Medicare beneficiaries may buy individual Medicare supplemental policies, known as Medigap plans, from private insurers. By law, an insurer selling Medigap must offer one or more of ten standardized plans. Three of these, known as plans H, I, and J, include some prescription drug coverage.19 These three Medigap plans impose a $250 deductible. They then pay 50% of covered charges up to a maximum plan payment of $1,250 for plans H and I and $3,000 for plan J. Some beneficiaries who bought policies before this law took effect have non-standardized plans; little is known about how many of these include drug coverage.20 A few states are also exempt from using the standardized plans.21
Many carriers do not offer the plans with drug coverage, and those who do may refuse coverage to applicants perceived to be high-risk. Carriers must accept all beneficiaries aged 65 and above during a limited open enrollment that ends 6 months after the beneficiary first qualifies for Medicare; no open enrollment requirement applies to disabled beneficiaries under the age of 65.22 In addition, twelve states have laws requiring community rating or preventing Medigap insurers from raising premiums as policy holders age, a practice known as attained-age rating.23
Premiums for the plans with drug coverage are much higher than for other Medigap plans, both because of the cost of the drug benefit itself and because the benefit is likely to attract beneficiaries who incur higher general medical expenses. An analysis of June 1999 premiums for some of the major Medigap carriers found that the premium for individuals aged 65 averaged $1,000 higher for plan J than for plan F, the most similar plan without drug benefits; the gap between premiums for the F and J plans increased for older beneficiaries in plans that used attained-age rating. In some cases, the incremental premium for adding drug coverage was greater than the maximum value of the benefit.
Some Medigap plans have begun to use PBMs. Since July 1998, United HealthCare, a health plan that also sells Medigap policies through AARP, has employed a PBM to negotiate lower drug prices for its H, I, and J policyholders at preferred pharmacies. Through their PBM, United HealthCare is also able to offer point of sale copayments and drug-interaction screening to its Medigap policyholders. However, most plans are still indemnity plans, which reimburse participants for their drug expenditures after the fact and do not manage the benefit.
The category of individually purchased coverage also includes a variety of additional supplements. Some individuals purchase non-Medigap policies, such as private long- term care insurance or drug-only policies. The exact number of these policies and the value of the benefits they include is unknown. The term “Medigap” will be used to describe the entire category of individually purchased Medicare supplemental insurance in the remainder of this report.
There is no reliable source of information about the nature of the drug benefits provided to non-Medicare enrollees in private nongroup insurance plans, or about how these benefits are administered.
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