Variation and Trends in Medigap Premiums

Office of the Assistant Secretary for Planning and Evaluation

The Office of the Assistant Secretary for Planning and Evaluation (ASPE) is the principal advisor to the Secretary of the Department of Health and Human Services (HHS) on policy development issues. It is responsible for major activities in the areas of legislative and budget development, strategic planning, policy research and evaluation, and economic analysis.

ASPE plans and conducts evaluations and research—both in‐house and through support of projects by external researchers—of current and proposed programs and of topics of particular interest to the Secretary, the Administration, and the Congress.

Office of Health Policy

The Office of Health Policy (HP) in ASPE focuses on health‐related issues, including public health, health care delivery, health insurance, and health care financing programs in the public (e.g., Medicare, Medicaid, State Children’s Health Insurance Program) and private sectors. It is responsible for health‐related policy development and analysis, budget review, assisting with the development of legislation, and review of regulations.

This report examines the variation in Medigap premiums, recent trends in premium growth and policies that experience relatively high premium growth. The report also compares the premium growth over different segments of the entire time period studied, and to changes in enrollment in both Medigap policies and the Medicare Advantage Program.

Executive Summary

In response to a letter from Senators Reid, Baucus, and Kerry,¹ the Office of the Assistant Secretary for Planning and Evaluation of the U.S. Department of Health and Human Services has prepared this report. The report describes the market in Medigap insurance (also known Medicare Supplemental Health Insurance policies), analyzes trends in Medigap premiums, and explores factors that may be associated with Medigap policies that have significantly higher than average increases in premiums.

We find that:

1. Overall, Medigap premiums have risen moderately over the past decade, and significantly more slowly than the growth in Medicare spending per beneficiary. Between 2001 and 2010, the average annual increase in Medigap premiums was 3.8 percent, compared to a 5.4 percent average annual increase in total Medicare spending per beneficiary (excluding Part D spending).
2. In 2010, 9.6 million Medicare beneficiaries – approximately 20% of all beneficiaries ‐ purchased Medigap coverage. The share of Medicare beneficiaries purchasing Medigap coverage has declined from approximately 26 percent in 2001.
3. Medigap premiums vary by plan type. The most popular plan types (F and C) had average enrollment‐weighted monthly premiums of $171 and $178 respectively in 2010. Plans M and N, which cover a smaller share of Medicare out‐of‐pocket costs, had the lowest average premiums at $47 and $28 per month in 2010, but together these relatively‐new plans covered fewer than 2 percent of total Medigap enrollees.²
4. There is significant variation across states in average enrollment‐weighted monthly Medigap premiums, from a low of $129 in Michigan to a high of $219 in New York in 2010. One explanation for this range could be the mix of different plan types within a state, but variation in premiums persists even when looking only at Plan F or Plan C. Average Medicare spending per capita at the state level is a strong predictor of Medigap premiums – a ten percent difference in Medicare spending per beneficiary at the state level is associated with a six percent difference in Medigap premiums.
5. Variation at the state level in Medigap premium growth is significantly related to state trends in Medicare spending per beneficiary.
6. The rapid increase in Medicare Advantage (MA) enrollment that began in 2006 is associated with reduced rates of growth in Medigap premiums.
7. Although the increase in Medigap premiums was generally moderate over the past decade, premiums for some beneficiaries increased at rates that were substantially greater than average. About ten percent of Medigap policies, accounting for approximately 3 percent of enrollment, had average annual premium increases of more than 20 percent during the 2007‐2010 period. These “outlier” policies tended to be newer and were more likely to be experiencing large positive or negative changes in enrollment.

Background

While Medicare covers many services, it does not cover them in full. Individuals with Medicare coverage are responsible for some out‐of‐pocket expenses such as copayments, coinsurance, and deductibles (see Appendix A for more information). Fee‐for‐service Medicare also does not include a cap on out‐of‐pocket payments. Medigap (also called “Medicare Supplemental Health Insurance”) is a form of private health insurance designed to “supplement” Medicare by filling in these “gaps” in Medicare payment.

These gaps in acute care coverage fall into two main categories:³

1. Cost‐sharing provisions for Medicare‐covered services, including annual deductibles and copayments for expenses covered by Part A and Part B; and
2. Limitations on Medicare‐covered services (e.g. skilled nursing facility care and home health care are only covered partially or with severe restrictions) or non‐covered services (e.g. outpatient prescription drugs before 2006).

Section 1882 of the Social Security Act pertains to Medigap plans and establishes standards for the various types of plans offered. The standard Medigap plans can be identified by the letters A through N.^{4, 5} Each standardized Medigap plan must offer the same basic benefits no matter which insurance company sells it (see Figure 1). Therefore, cost and administrative features such as customer service are the primary differences between standardized Medigap plans with the same letter.

Figure 1:

Medigap Plan Types

How to read the chart:

If a check mark appears in a column of this chart, the Medigap policy covers 100% of the described benefit. If a row lists a percentage, the policy covers that percentage of the described benefit. If a row is blank, the policy doesn't cover the benefit. Note: The Medigap policy covers coinsurance only after you have paid the deductible (unless the Medigap policy also covers the deductible.)

1. During the beneficiary’s open enrollment period (prior to or during the six month period beginning with the first month of the first day on which the beneficiary is 65 or older and is enrolled in Medicare Part B).
2. A guaranteed issue (GI) period, which covers seven scenarios (generally when a beneficiary’s current source of coverage no longer participates in the Medicare program).⁶

Outside of these two periods, a Medigap insurer may choose whether to accept an application from a beneficiary who is seeking an initial policy or one who is looking to switch to another insurer (as in shopping for price).

Medicare beneficiaries purchase Medigap policies primarily for two reasons: 1) to protect themselves from potentially high out‐of‐pocket costs and 2) to eliminate the hassle and confusion of handling complex medical bills.⁷ Medicare Advantage plans and other forms of supplemental insurance such as Medicaid and retiree coverage also provide protection against Medicare cost sharing requirements. In 2009, about 8 percent of Medicare beneficiaries were enrolled in fee‐for‐service only (Table 1) meaning they did not have any supplemental coverage.

Table 1:
Supplemental Coverage of Medicare Beneficiaries, by Income Range, 2009