Report to Congressional Committees

United States General Accounting Office

GAO

July 2001 MEDIGAP

INSURANCE

Plans Are Widely

Available but Have

Limited Benefits and

May Have High Costs

GAO-01-941
Page i GAO-01-941 Medigap Insurance

Letter 1

Results in Brief 2

Background 3

Medigap Enrollment Exceeds 10 Million, Mostly Concentrated in

Two Plans 7

Medigap Plans Are Widely Available in Most States, But Access

May Be Limited for Certain Beneficiaries 10

Beneficiaries With Medigap Policies May Still Incur Significant Outof-Pocket Costs 12

Concluding Observations 20

Appendix I Methodology 23

Appendix II Insurers Offering Standardized Medigap Plans During

Open-Enrollment Periods 27

Appendix III Average Annual Premiums by State 30

Related GAO Products 32

Tables

Table 1: Medicare Coverage and Beneficiary Cost Sharing for 2001 4

Table 2: Benefits Covered by Standardized Medigap Policies 5

Table 3: Insurers Offering Medigap Plans to 65-Year-Olds During

Open Enrollment 11

Table 4: Annual Premiums Per Covered Life, 1999 13

Table 5: Range of Annual Premium Prices for Selected Plans for a

65-Year-Old in Five States with Large Medicare

Populations 15

Table 6: Expenditures by Payer for Beneficiaries With an

Individually Purchased Medigap Policy, 1998a 19

Table 7: Number and Percent of Beneficiaries by Insurance

Category, 1998 26

Contents
Page ii GAO-01-941 Medigap Insurance

Table 8: Number of Insurers Offering Standardized Medigap

Policies by Plan Type and by State to 65-Year-Olds in Their

Initial Open-Enrollment Period 28

Table 9: Average Annual Premiums Per Covered Life by State, 1999 30

Figures

Figure 1: Percentage Enrolled in Standardized Medigap Plans by

Plan Type, 1999 8

Figure 2: Out-of-Pocket Costs (Excluding Long-Term Facility Care

Costs) for Medicare Beneficiaries, 1998 17
Page 1 GAO-01-941 Medigap Insurance

July 31, 2001

Congressional Committees

Millions of Medicare beneficiaries depend on private insurance to cover

expenses not covered by Medicare, such as deductibles, copayments,

coinsurance, and prescription drugs. To protect themselves against large

out-of-pocket costs and help fill Medicare’s coverage gaps, most

beneficiaries purchase Medicare supplemental insurance (known as

Medigap), contribute towards employer-sponsored retiree health benefits

to supplement Medicare’s coverage, or enroll in private Medicare+Choice

plans as an alternative to the traditional fee-for-service Medicare plan.

Since Medicare+Choice plans are not available in many parts of the

country and many employers do not offer retiree health benefits, Medigap

may be the only supplemental insurance option widely available to

seniors. In particular, federal law guarantees beneficiaries the right to

purchase a Medigap policy during the first 6 months after they are 65 and

elect Medicare coverage for physician services, outpatient care, and

certain other services.

The role of Medicare supplemental insurance is one of several issues that

Congress has considered as part of its ongoing deliberations on Medicare

reform, including proposed prescription drug coverage and other coverage

alternatives for beneficiaries.1

 The Consolidated Appropriations Act for

2000 required us to report on Medigap insurance, including (1) enrollment

levels; (2) availability across states and to individuals, especially those

outside of their initial 6-month enrollment period; and (3) premiums and

other out-of-pocket costs for health care expenses incurred by

beneficiaries who purchase Medigap plans.2

 To provide information on

these issues, we analyzed data collected on the National Association of

Insurance Commissioners’ (NAIC) 1999 Medicare Supplement Insurance

Experience Exhibit and the Health Care Financing Administration’s

 1

See also Medicare: Cost Sharing Policies Problematic for Beneficiaries and Program

(GAO-01-713T, May 9, 2001).

2

See Consolidated Appropriations Act for Fiscal Year 2000, P.L. 106-113, Appendix F,

Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, Section 553(a).

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-941 Medigap Insurance

(HCFA)3 1998 Medicare Current Beneficiary Survey (MCBS). We also

examined consumer guides for Medicare beneficiaries issued by most

states and HCFA. In addition, we interviewed selected insurers, HCFA

officials and state insurance regulators, and trade association

representatives. Appendix I provides additional information on our

methodology. We conducted our work from March 2001 through July 2001

in accordance with generally accepted government auditing standards.

About 10.7 million Medicare beneficiaries—more than one-fourth of all

beneficiaries—relied on Medigap policies in 1999 to cover some out-ofpocket costs and services not covered by Medicare. More than 60 percent

purchased 1 of 10 standardized policy types, while the remainder had

policies sold before federal law required the standardization of benefits in

July 1992 or were in one of three states in which insurers are exempt from

offering the federally standardized plans. Nearly two-thirds of those with a

standardized Medigap policy purchased two mid-level policies that cover

Medicare’s cost-sharing requirements and selected other benefits but do

not have any prescription drug coverage. Relatively few Medigap

purchasers (8 percent of those purchasing a standardized Medigap policy)

have bought the standardized plans that include prescription drug

coverage. Low enrollment in these Medigap plans may be due to fewer

plans with prescription drug benefits being marketed, higher premiums for

these plans, and limits in coverage whereby beneficiaries are required to

pay more than half of their drug costs while catastrophic prescription drug

expenses are not covered.

Medigap policies are widely available to 65-year-old Medicare beneficiaries

during the initial 6-month open-enrollment period guaranteed by federal

law. In nearly every state, multiple insurers offer every Medigap policy, but

the extent to which beneficiaries can select from among insurers offering

different plan types and at different prices varies depending on where they

live and other circumstances. All insurers that market Medigap must offer

the standardized plan with the fewest benefits. Most insurers also offer

other plans with additional standardized optional benefits, but

comparatively few offer the three standardized plans that include

prescription drug coverage. For example, in New York only a single

 3

On June 14, 2001, the Secretary of Health and Human Services announced that the name of

HCFA had been changed to the Centers for Medicare and Medicaid Services (CMS). In this

report, we will continue to refer to HCFA where our findings apply to information provided

by the agency under that name.

Results in Brief
Page 3 GAO-01-941 Medigap Insurance

insurer offers one of the three plans with prescription drug benefits, in

Rhode Island only a single insurer offers any of the plans with prescription

drug benefits, and in Delaware no insurer offers one of the plans with

prescription drugs. In general, access may be more limited to beneficiaries

who are not in the initial 6-month open-enrollment period or otherwise

eligible for federal guarantees applying to certain other circumstances,

such as when an employer terminates health benefits or their

Medicare+Choice plan withdraws from their area. Depending on their

health status, beneficiaries purchasing Medigap outside these periods or

who want to switch to a plan with more benefits may find coverage

alternatives limited or expensive.

Some Medigap policies can have relatively high premiums and may still

leave Medicare beneficiaries with significant out-of-pocket costs for health

care services. Overall, the average annual premium was more than $1,300

in 1999. Standardized plans with prescription drug coverage were more

expensive—averaging more than $1,600 compared to about $1,150 for

standardized plans without prescription drug coverage. Average premiums

varied widely by state. For example, the average premium for standardized

plans in California was 35 percent higher than the national average and

more than twice as high as in New Hampshire, New Jersey, and Utah.

Premiums also varied widely within the same state. For example, a

Medicare beneficiary can find that premiums offered by different insurers

for the same plan type often vary by two times and sometimes even more

depending on several factors, including the premium rating methodology

insurers use. In addition to their premium payments, Medigap purchasers

continue to have significant out-of-pocket costs for health care services,

averaging about $1,400 in 1998.

Medicare is typically the primary source of health insurance coverage for

seniors. Individuals who are eligible for Medicare automatically receive

Hospital Insurance, known as part A, which helps pay for inpatient

hospital care, skilled nursing facility services following a hospital stay,

hospice care, and certain home health care services. Beneficiaries

generally pay no premium for this coverage but are liable for required

deductibles, coinsurance, and copayments. Medicare-eligible beneficiaries

may elect to purchase Supplemental Medical Insurance, known as part B,

which helps pay for selected physician, outpatient hospital, laboratory,

and other services. Beneficiaries must pay a premium for part B coverage,

currently $50 per month. Beneficiaries are also responsible for part B

deductibles, coinsurance, and copayments. See table 1 for a summary of

Medicare’s beneficiary cost-sharing requirements for 2001.

Background
Page 4 GAO-01-941 Medigap Insurance

Table 1: Medicare Coverage and Beneficiary Cost Sharing for 2001

Part A coverage Beneficiary cost-sharing requirements

Inpatient hospital $792 deductible per admissiona

$198 copayment per day for days 61-90

$396 copayment per day for days 91-150

All costs beyond 150 days

Skilled nursing facility No cost sharing for first 20 days

$99 copayment or less for days 21-100

All costs beyond 100 days

Home health No cost sharing

20 percent coinsurance for durable medical equipment

Hospice $5 copayment for outpatient drugs

5 percent coinsurance for inpatient respite care

Blood Cost of first 3 pints

Part B coverageb

Physician and medical $100 deductible per year

20 percent coinsurance for most services

50 percent coinsurance for mental health services

Clinical laboratory No cost sharing

Home health No cost sharing

20 percent coinsurance for durable medical equipment

Outpatient hospital Cost sharing varies by service and may exceed 50 percent

Blood Cost of first 3 pints

20 percent coinsurance for additional pints

a

No deductible is charged for second and subsequent hospital admissions if they occur within 60 days

of the beneficiary’s most recent covered inpatient stay.

b

No cost sharing is required for certain preventive services—including specific screening tests for

colon, cervical, and prostate cancer, and flu and pneumonia vaccines.

Source: HCFA, Medicare & You 2001.

To help pay for some of Medicare’s cost-sharing requirements as well as

some benefits not covered by Medicare parts A or B, most Medicare

beneficiaries have some type of supplemental coverage. Privately

purchased Medigap is an important source of this supplemental coverage.

Other supplemental coverage options may include coverage through an

employer, enrolling in a Medicare+Choice plan that typically offers lower

cost-sharing requirements and additional benefits such as prescription

drug coverage in exchange for a restricted choice of providers, or

assistance from Medicaid, the federal-state health financing program for

low-income individuals, including aged or disabled individuals.
Page 5 GAO-01-941 Medigap Insurance

The Omnibus Budget Reconciliation Act (OBRA) of 19904 required that

Medigap plans be standardized in as many as 10 different benefit packages

offering varying levels of supplemental coverage. All policies sold since

July 1992 (except in three exempted states) have conformed to 1 of these

10 standardized benefit packages, known as plans A through J. (See table

2.) In addition, beneficiaries may purchase Medicare Select, a type of

Medigap policy that generally costs less in exchange for a limited choice of

providers. A high-deductible option is also available for plans F and J.

Policies sold prior to July 1992 are not required to comply with these 10

standard packages. Insurers in Massachusetts, Minnesota, and Wisconsin

are exempt from offering these standardized plans because these states

standardized their Medigap policies prior to the establishment of the

federal standardized plans.

Table 2: Benefits Covered by Standardized Medigap Policies

Benefits Plan A Plan B Plan C Plan D Plan E Plan Fa Plan G Plan H Plan I Plan Ja

Coverage for:

• Part A coinsurance

• 365 additional hospital days

during lifetime

• Part B coinsurance

• Blood products

XXXXXXXXXX

Skilled nursing facility coinsurance X X X X X X X X

Part A deductible X X X X X X X X X

Part B deductible X X X

Part B balance billingb XX XX

Foreign travel emergency X X X X X X X X

Home health care X X X X

Prescription drugs Xc Xc Xc

Preventive medical care X X

a

Plans F and J also have a high-deductible option that requires the beneficiary to pay $1,580 before

receiving Medigap coverage. This deductible is in addition to separate deductibles for prescription

drugs ($250 per year for plan J) and foreign travel emergency ($250 per year for plans F and J) which

are required in these plans with or without the high-deductible option.

b

Some providers do not accept the Medicare rate as payment in full and “balance bill” beneficiaries for

additional amounts that can be no more than 15 percent higher than the Medicare payment rate. Plan

G pays 80 percent of balance billing; plans F, I, and J cover 100 percent of these charges.

c

Plans H and I pay 50 percent of drug charges up to $1,250 per year and have a $250 annual

deductible. Plan J pays 50 percent of drug charges up to $3,000 per year and has a $250 annual

deductible.

Source: HCFA, 2001 Guide to Health Insurance for People With Medicare.

 4

P.L. 101-508, section 4351, 104 Stat. 1388, 1388-127.
Page 6 GAO-01-941 Medigap Insurance

Medigap coverage is widely available to most beneficiaries. Federal law

provides Medicare beneficiaries with guaranteed access to Medigap

policies offered in their state of residence during an initial 6-month openenrollment period, which begins on the first day of the month in which an

individual is 65 or older and is enrolled in Medicare Part B. During this

initial open-enrollment period, an insurer cannot deny Medigap coverage

for any plan types they sell to eligible individuals, place conditions on the

policies, or charge a higher price because of past or present health

problems.5

 Additional federal Medigap protections include “guaranteedissue” rights, which provide beneficiaries over age 65 access to plans A, B,

C, or F in certain circumstances, such as when their employer terminates

retiree health benefits or their Medicare+Choice plan leaves the program

or stops serving their area.6

 Depending on laws in the state where

applicants reside and their health status, insurers may choose to offer

more than these four plans. Federal law also allows individuals who join a

Medicare+Choice plan when they first become eligible for Medicare7

 and

who leave the plan within 1 year of joining to purchase any of the 10

standardized Medigap plans sold in their respective states.8

 5

Policies sold during the open-enrollment period can exclude coverage for any preexisting

conditions for up to 6 months. However, if the beneficiary had prior coverage and applied

for Medigap within 63 days after this prior coverage ends, he or she receives credit to

reduce or eliminate the length of the preexisting-condition exclusion period.

6

Individuals must apply for a Medigap plan no later than 63 days after their prior health

coverage ends for these guarantees to apply. During the guaranteed-issue periods no

preexisting-condition exclusion period may be applied.

7

This right to join any Medigap plan when a beneficiary leaves a Medicare+Choice plan

within one year also exists for beneficiaries who have been involuntarily terminated by a

prior Medicare+Choice plan, such as when a plan withdraws from their area.

8

To be eligible for these federal access protections, beneficiaries must apply no later than

63 calendar days after their Medicare health plan coverage ends. In addition, federal

protections allow individuals who dropped their Medigap plan to join a Medicare+Choice

plan or buy a Medicare Select policy to return to their former Medigap policy if they leave

the new plan within 1 year. In the event the original plan is not available, these individuals

become eligible for plans A, B, C, or F.
Page 7 GAO-01-941 Medigap Insurance

In 1999, about 10.7 million Medicare beneficiaries—more than one-fourth

of all beneficiaries—had a Medigap policy to help cover Medicare’s costsharing requirements as well as some benefits not covered by Medicare

parts A or B.9

 Of those having Medigap coverage in 1999, about 61 percent

purchased 1 of the 10 standardized plans (A through J), while about 35

percent had supplemental plans that predate standardization. The

remaining 4 percent had Medigap plans meeting state standards in the

three states—Massachusetts, Minnesota, and Wisconsin—in which

insurers are exempt from offering the federally standardized plans.

Among the 10 standardized plans, over 60 percent of purchasers were

enrolled in two mid-level plans (C or F), which cover part A and part B

cost-sharing requirements but do not cover prescription drugs. There are

several reasons why these plans may be particularly popular among

beneficiaries. For example, both plans cover the part B deductible, which

insurers report is a popular benefit for purchasers.10 They also represent

two of the four plans that insurers are required to guarantee issue during

special enrollment periods.11 With the exception of plan B, in which 13

percent were enrolled, less than 7 percent of beneficiaries selected any

one of the remaining seven plans. (See fig. 1.)

 9

NAIC reports that Medigap enrollment has declined from about 14 million in 1994. In part,

this decline may be related to increasing enrollment in Medicare health maintenance

organizations (HMOs), including the development of Medicare+Choice options, which

HCFA reports grew from about 2.3 million beneficiaries in 1994 to 6.3 million in 1999.

HCFA reported that Medicare+Choice enrollment declined to about 5.7 million in 2001 as

some Medicare+Choice plans have withdrawn from the program.

10Plans C, F, and J are the only Medigap plans that cover the Medicare Part B deductible,

which was $100 per year in 2000.

11Only insurers that sell plans A, B, C, and F are required to guarantee issue them during

special enrollment periods.

Medigap Enrollment

Exceeds 10 Million,

Mostly Concentrated

in Two Plans
Page 8 GAO-01-941 Medigap Insurance

Figure 1: Percentage Enrolled in Standardized Medigap Plans by Plan Type, 1999

Note: Total does not equal 100 due to rounding.

Source: GAO Analysis of NAIC data.

Enrollment in the three plans with prescription drug coverage—H, I, and

J—is relatively low (a total of 8 percent of standardized plan enrollment)

for several reasons. Insurance representatives noted that the drug

coverage included in these plans is limited while the premium costs are

higher than plans without this coverage. For example, under the Medigap

plan with the most comprehensive drug coverage (plan J), a beneficiary

would have to incur $6,250 in prescription drug costs to receive the full

$3,000 benefit because of the benefit’s deductible and coinsurance

requirements. Moreover, insurers often medically underwrite these

plans—that is, screen for health status—for beneficiaries enrolling outside

4

13

26

6

2

37

2 2 2

4

0

5

10

15

20

25

30

35

40

Percent of enrollees 

ABCDE FGH I J

Plan type

Does not include prescription drug coverage Includes prescription drug coverage
Page 9 GAO-01-941 Medigap Insurance

of their open-enrollment period. Thus, individuals in poor health who want

to purchase a plan with drug coverage may be denied or charged a higher

premium. Further, insurers may be reluctant to market Medigap plans with

prescription drug coverage because they would be required to offer them

to any applicant regardless of health status during beneficiaries’ initial 6-

month open-enrollment period, according to NAIC officials. Finally, an

insurance representative attributed low enrollment in these plans to

beneficiaries who do not anticipate a need for a prescription drug benefit

at the time they enroll.

Relatively few beneficiaries have purchased the Medicare Select and highdeductible plan options, which were created to increase the options

available to beneficiaries.12 About 9 percent of beneficiaries enrolled in

standardized Medigap plans had a Medicare Select plan in 1999. With

Medicare Select, beneficiaries buy 1 of the 10 standardized plans but are

limited to choosing among hospitals and physicians in the plan’s network

except in emergencies.13 In exchange for a limited choice of providers,

premiums are typically lower, averaging $979 in 1999, or more than $200

less than the average Medigap premium for a standardized plan. Similarly,

insurers report that few individuals choose the typically lower priced highdeductible option available for plans F and J. These options require

beneficiaries to pay a $1,580 deductible before either plan covers any

services.14 An NAIC official noted that these options may have relatively

low enrollment because beneficiaries may prefer first-dollar coverage and

no restrictions on providers. In addition, an insurance representative

noted that administrative difficulties and higher costs associated with

operating these plans have discouraged some insurers from actively

marketing these products, which likely contributes to the low enrollment.

Beneficiaries do not have access to Medicare Select plans in all states—

NAIC reports that 15 states do not have insurers within the state selling

Medicare Select plans.

 12Medicare Select plans were authorized by the Medigap Improvements Act of 1990 (P.L.

101-508, section 4358, 104 Stat. 1388, 1388-135) and were first made available in a limited

number of states in 1992. Section 4032 of the Balanced Budget Act of 1997 (P.L. 105-33, 111

Stat. 355, 359) authorized the addition of high-deductible Medigap policies.

13Medicare Select options are also available in Minnesota and Wisconsin even though

insurers are exempt from selling the standard Medigap plans in these states.

14In addition, beneficiaries purchasing the high-deductible option are responsible for the

deductibles for prescription drugs ($250 per year for plan J) and emergency coverage

during foreign travel ($250 per year for plans F and J) that are required in these plans with

or without the high-deductible option.
Page 10 GAO-01-941 Medigap Insurance

While consumers typically have access to all 10 standardized Medigap

plans during their 6-month open-enrollment periods, the extent to which

they can choose from among multiple insurers offering these plans varies

depending on where they live. Insurance companies marketing Medigap

policies must offer plan A and frequently offer plans B, C, and F, but are

less likely to offer the other six plans, particularly those plans with

prescription drug coverage.15 (See table 3.) Our review of state consumer

guides and other information from states and insurers shows that during

the 6-month open-enrollment period applicants typically have access to

multiple Medigap insurers, with the most options available for plans A, B,

C, and F.16 For example, in 19 states, every Medigap insurer offered plan F

to these beneficiaries. In contrast, fewer insurers offer Medigap plans with

prescription drug benefits. Although in most states several insurers offer

these plans, state consumer guides indicate that only one insurer offers

plan J in New York and plans H, I, and J in Rhode Island. In addition, no

insurers market plan H in Delaware or plans F, G, or I in Vermont.17

Appendix II includes a summary of the number of insurers estimated to

offer Medigap plans in each state.

 15Insurers that sell plans A, B, C, and F are required to offer them to eligible beneficiaries

during special enrollment periods.

16Most states publish a consumer guide for Medicare beneficiaries, which typically

describes Medigap benefits and rights, as well as provides a list of insurers who offer

Medigap plans. Some of these consumer guides note that not all insurers reported

information on plans offered in the state. To supplement information provided in the

consumer guides of certain states, we also called state insurance regulators and individual

insurers.

17Vermont generally prohibits insurers from selling these plans because state law generally

does not permit physicians to balance bill for charges higher than Medicare’s agreed rates.

Since plans F, G, and I vary from other standardized plan types only in that they cover Part

B balanced billing, they do not provide additional value to beneficiaries in Vermont. See

Vermont Statutes Annotated, Title 33, section 6502; Vermont Medicare Supplement

Insurance Minimum Standards, CVR section 21-040-13 paragraph 9B.

Medigap Plans Are

Widely Available in

Most States, But

Access May Be

Limited for Certain

Beneficiaries
Page 11 GAO-01-941 Medigap Insurance

Table 3: Insurers Offering Medigap Plans to 65-Year-Olds During Open Enrollment

Plan type

ABCDE FGH I J

Percent of insurers estimated to offer

 Medigap plans

100 67 92 52 26 89 41 19 24 18

Median number of insurers estimated to

 offer Medigap plans in each state

30 20 27 16 8 28 12 5 7 5

Source: GAO review of state consumer guides. For certain states, including those that did not have a

consumer guide or whose consumer guides identified three or fewer Medigap insurers, we obtained

additional information from HCFA, state insurance departments, and insurers.

While beneficiaries in most states have access to multiple insurers for

most Medigap plans, a few insurers represent most Medigap enrollment. In

all but one state, United HealthCare Insurance Company or a Blue

Cross/Blue Shield plan represents the largest Medigap insurer. Nationally,

about 64 percent of Medigap policies in 1999 were sold by either United

HealthCare or a Blue Cross/Blue Shield plan. United HealthCare offers all

10 Medigap policies to AARP18 members during their initial 6-month openenrollment period in nearly all states and charges applicants in a

geographic area the same premium regardless of their health status (a

rating practice known as community rating). Outside of beneficiaries’ 6-

month open-enrollment period, United HealthCare also offers applicants

without end-stage renal disease (i.e., permanent kidney failure) plans A

through G without medically underwriting—that is, screening

beneficiaries for health status—in states where it sells these policies. In an

effort to minimize adverse selection and to remain competitive, United

HealthCare medically underwrites applicants for the three plans with

prescription drug coverage who are outside their initial open-enrollment

period.

Medicare beneficiaries who are not in their open-enrollment period or do

not otherwise qualify for one of the special enrollment periods, such as

when an employer eliminates supplemental coverage or a

Medicare+Choice plan stops serving an area, are not guaranteed access

under federal law to any Medigap plans. Depending on their health, these

individuals may find coverage alternatives to be reduced or more

 18Formerly known as the American Association of Retired Persons, the association has

changed its name to AARP. While access to the AARP Medigap plans through United

HealthCare requires the beneficiary to be a member of AARP, this membership is widely

available to nearly all Medicare beneficiaries (except disabled beneficiaries younger than

AARP’s membership age of 50) for a nominal annual fee.
Page 12 GAO-01-941 Medigap Insurance

expensive. Outside of the initial or special open-enrollment periods, access

to any Medigap plan could depend on the individual’s health, the insurer’s

willingness to offer coverage, and states’ laws.19 Further, beneficiaries

whose employer terminates their health coverage or whose

Medicare+Choice plan withdraws from the program are only guaranteed

access to Medigap plans A, B, C, and F, which do not offer prescription

drug coverage.

Medicare beneficiaries can change Medigap policies, but may be subject to

insurers’ screening them for health conditions prior to allowing a change

to a Medigap policy with more generous benefits outside openenrollment/guaranteed-issue periods. If a person has a Medigap policy for

at least 6 months and decides to switch plans, the new policy generally

must cover all preexisting conditions. However, if the new policy has

benefits not included in the first policy, the company may make a

beneficiary wait 6 months before covering that benefit or, depending on

the health condition of the applicant, may charge a higher premium or

deny the requested change. According to an insurer representative,

virtually all Medigap insurers will screen the health condition of applicants

who want to switch to plans H, I, or J to avoid the potential for receiving a

disproportionate share of applicants in poor health.

Beneficiaries purchasing Medigap plans may still incur significant out-ofpocket costs for health care expenses in addition to their premiums. In

1999, the average annual Medigap premium was more than $1,300,

although a number of factors, such as where a beneficiary lives and

insurer rating practices, may contribute to significant variation in the

premiums charged by insurers. Despite their supplemental coverage,

Medicare beneficiaries with Medigap coverage paid more out-of-pocket for

health care services (excluding long-term care facility care) than any other

group of beneficiaries even though their self-reported health status was

generally similar to other beneficiaries.

 19In addition to federal protections, HCFA’s 2000 Guide to Health Insurance for People with

Medicare reports that 21 states also provide other safeguards for beneficiaries purchasing

Medigap policies. For example, Arkansas and Florida do not allow insurers to set

premiums for standardized plans using an “attained-age” methodology, whereby insurers

increase premium prices as individuals age. New York requires community rating of

premiums and provides all Medicare beneficiaries with open enrollment at all times for all

10 standardized Medigap plans.

Beneficiaries With

Medigap Policies May

Still Incur Significant

Out-of-Pocket Costs
Page 13 GAO-01-941 Medigap Insurance

Medigap plans can be relatively expensive, with an average annual

premium of more than $1,300 in 1999. Premiums varied widely based on

the level of coverage purchased. Among the 10 standardized plans, plan A,

which provides the fewest benefits, was the least expensive with average

premiums paid of nearly $900 per year. The most popular plans—C and

F—had average premiums paid of about $1,200. (See table 4.) The plans

with prescription drug coverage—H, I, and J—had average premiums paid

more than $450 higher than those plans without such coverage ($1,602

compared to $1,144).

Table 4: Annual Premiums Per Covered Life, 1999

Medigap plan Average annual premium per covered life

A $877

B 1,093

C 1,158

D 1,032

E 1,067

F 1,217

G 981

H 1,379

I 1,698

J 1,672

Standardized plans A through J 1,185

Plans in states in which insurers are

exempt from plan standardsa

1,368

Pre-standard (policies originally sold

before July 1992)

1,525

Average 1,311

a

Massachusetts, Minnesota, and Wisconsin have alternative standardized plans in effect and insurers

in these states are exempt from offering the federal standardized Medigap plans.

Note: Data reported by insurers to the NAIC do not include plan type for policies representing less

than 8 percent of Medigap policy covered lives, with an average paid premium of $1,275. These plans

are excluded from the data reported in the table.

Source: GAO analysis of data collected by the NAIC from the 1999 Medicare Supplement Insurance

Experience Exhibit.

In addition, Medigap policies are becoming more expensive. One recent

study reports that premiums for the three Medigap plans offering

prescription drug coverage have increased the most rapidly—by 17 to 34

Medigap Policies Can Have

High Cost
Page 14 GAO-01-941 Medigap Insurance

percent from 1999 to 2000. Medigap plans without prescription drug

coverage rose by 4 to 10 percent from 1999 to 2000.20

Additional factors, such as where Medicare beneficiaries live or specific

demographic or behavioral characteristics, also may influence variation in

Medigap premiums. For example, premiums often vary widely across

states, which may in large part reflect geographic differences in use and

costs of health care services as well as state policies that affect how

insurers can set premium rates. Additionally, premiums for the same

policy can vary significantly within the same state. The method used by

insurers to determine premium rates can dramatically impact the price a

beneficiary pays for coverage over the life of the policy. Finally, depending

on the state or insurer, other factors such as smoking status and gender

may also affect the premiums consumers are charged.

Premiums vary widely among states. For example, based on data reported

by the insurers to NAIC, average premiums per covered life for

standardized Medigap plans in California were $1,600 in 1999—more than

one-third higher than the national average of $1,185 and more than twice

as high as Utah’s average of $706. (See app. III for average premiums per

covered life for standardized plans by state.) This variation is also evident

for specific plan types. For example, average annual premiums per

covered life for plan J were $646 in New Hampshire and $2,802 in New

York, and for plan C were $751 in New Jersey and $1,656 in California. In

six states (i.e., Alabama, California, Florida, Illinois, Louisiana, and Texas),

the average premium per covered life exceeded the national average for all

10 standard plan types while in six states (i.e., Hawaii, Montana, New

Hampshire, New Jersey, Utah, and Vermont), the average premium per

covered life always fell below the national average.

Beneficiaries in the same state may also face widely varying premiums for

a given plan type offered by different insurers. For example, our review of

state consumer guides showed that in Texas, a 65-year-old consumer could

pay an annual premium from $300 to as much as $1,683 for plan A,

depending on the insurer. Similarly, in Ohio, plan F annual premiums for a

65-year-old ranged from $996 to $1,944 and in Illinois, plan J premiums

ranged from $2,247 to $3,502. Table 5 provides premium ranges for a 65-

year-old in five states with large Medicare populations.

 20Weiss Ratings, “Prescription Drug Costs Boost Medigap Premiums Dramatically,” March

26, 2001, http://www.weissratings.com/NewsReleases/Ins_Medigap/20010326Medigap.htm.
Page 15 GAO-01-941 Medigap Insurance

Table 5: Range of Annual Premium Prices for Selected Plans for a 65-Year-Old in Five States with Large Medicare Populations

Plan A Plan C Plan F Plan J

Illinois $467 to $1,202 $802 to $1,633 $854 to $1,861 $2,247 to $3,502

New York $864 to $1,560 $1,408 to $2,385 $1,617 to $2,800 n/aa

Ohio $612 to $1,284 $924 to $2,064 $996 to $1,944 $2,028 to $3,156

Pennsylvania $500 to $1,373 $761 to $1,964 $802 to $1,649 $2,312 to $2,976

Texas $300 to $1,683 $664 to $2,125 $880 to $2,171 $2,059 to $5,658

a

Only one insurer reported offering plan J in New York’s consumer guide, with a premium of $3,552.

Source: State consumer guides prepared by state insurance departments for premiums typically

offered in 2000 or 2001.

Some of the variation seen in table 5 is attributable to differences in the

premium rating methodology used by different insurers. Insurers who

“community rate” policies charge all applicants the same premium,

regardless of their age. Those who use an “issue-age-rated” methodology

base premiums on an applicant’s age when first purchasing the policy, and

although the premium can increase for inflation, any such increase should

not be attributable to the aging of the individual. In addition to increases

for inflation, an “attained-age-rated” policy’s premium also increases as a

beneficiary ages. Although attained-age policies are generally cheaper

when initially purchased, they may become more expensive than issue-age

rated policies at older ages. For example, a Pennsylvania insurer that sells

both attained-age and issue-age policies for plan C charges a 65-year-old

male $869 for an attained-age policy or $1,347 for an issue-age policy. But

over time, under the attained-age rated policy, this individual would have

premium increases both due to inflation and the higher cost the insurer

anticipates as the policyholder ages. However, under the issue-age-rated

policy, rate increases would only reflect inflation because the higher

anticipated costs resulting from aging have already been included in the

premium rate. By age 80, excluding increases attributable to inflation, the

attained-age policy would cost $1,580 but the issue-age policy would

remain at $1,347. Individuals who did not anticipate premium increases

over time for attained-age policies may find it increasingly difficult to

afford continued coverage and consequently may let their Medigap

coverage lapse. Or, as their premiums increase and if an individual is still

in good health, individuals may switch to plans sold by insurers that

charge the same premium regardless of age, thus creating the potential for

these insurers to have a disproportionate share of older beneficiaries. For

individuals not in their open-enrollment period or otherwise eligible for a

guaranteed-issue product, insurers may also adjust premium prices based

on the health status of individuals.
Page 16 GAO-01-941 Medigap Insurance

Because the consumer guides show that insurers offer the same Medigap

plan type for a wide range in premiums, some plans with higher premiums

are unlikely to have high enrollment. Nonetheless, insurers may have an

incentive to continue offering higher cost plans despite low enrollment

because states prohibit insurers that stop marketing a plan type from

reentering the market and selling that particular plan for a 5-year period.

Insurers that may not want to completely exit a market may continue to

offer a plan type with a premium higher than the market rate, thereby

discouraging enrollment but ensuring their continued presence in the

market. However, federal law requiring Medigap plans to pay at least 65

percent of premiums earned for beneficiaries’ medical expenses for

individually purchased policies limits insurers’ ability to charge rates

excessively higher than the market rates.21

Despite purchasing Medigap policies to help cover Medicare cost-sharing

requirements and other costs for health care services that the beneficiary

would have to pay directly out of pocket, Medigap purchasers still pay

higher out-of-pocket costs than do other Medicare beneficiaries. Our

analysis of the 1998 MCBS showed that out-of-pocket costs for health care

services, excluding long-term facility care costs,22 averaged $1,392 for

those purchasing individual Medigap policies with prescription drug

coverage and $1,369 for those purchasing individual Medigap policies

without prescription drug coverage—significantly higher than the $1,056

average for all Medicare beneficiaries. (See fig. 2.) Furthermore, Medigap

purchasers had higher total expenditures for health care services ($7,631,

not including the cost of the insurance) than Medicare beneficiaries

without supplemental coverage from any source ($4,716) in 1998. These

higher expenditures for individuals with Medigap may be due in large part

to higher utilization rates for individuals with supplemental coverage. In

addition, Medigap’s supplemental coverage of prescription drugs is less

 21On average, nearly 80 percent of the Medigap premiums are spent for medical expenses.

In 1999, the 15 largest Medigap insurers spent between 64 and 88 percent of premiums on

medical expenses.

22We excluded long-term care facility costs because these costs represent a major cost for

some Medicare beneficiaries, but are not typically covered by Medicare or Medigap. Since

Medicaid or beneficiaries pay most of these costs, including these costs would

disproportionately increase out-of-pocket expenditures for some categories of Medicare

beneficiaries. Long-term care facilities include licensed nursing homes, retirement homes,

domiciliary or personal care facilities, mental health or mental retardation facilities,

continuing care facilities, assisted living facilities, and rehabilitation facilities.

Gaps in Coverage Leave

Medigap Purchasers With

Significant Out-of-Pocket

Costs
Page 17 GAO-01-941 Medigap Insurance

comprehensive than typically provided through employer-sponsored

supplemental coverage and therefore may leave beneficiaries with higher

out-of-pocket costs. Differences in health status do not appear to account

for higher out-of-pocket costs and expenditures for those with Medigap.

We found that Medicare beneficiaries with Medigap coverage reported a

health status similar to those without supplemental coverage.

Figure 2: Out-of-Pocket Costs (Excluding Long-Term Facility Care Costs) for

Medicare Beneficiaries, 1998

a

In addition to the subcategories of Medicare beneficiaries included in the figure, about 6 percent of

beneficiaries receive supplemental health care services through other public plans or private HMOs.

b

Medicare HMOs contract with the Medicare program to provide services to beneficiaries as an

alternative to the traditional fee-for-service Medicare program.

Source: GAO analysis of 1998 Medicare Current Beneficiary Survey.

Supplemental coverage can offset the effects of cost-sharing requirements

intended to encourage prudent use of services and thus control costs.

Providing “first-dollar coverage” by eliminating beneficiaries’ major cost

0

200

400

600

800

1,000

1,200

1,400

1,600

 All 

beneficiariesa

Medigap with

 prescription 

 drug coverage

 Medigap 

 without

 prescription 

 drug coverage

 Medicare 

fee-for-service 

 only

 Employer-

 sponsored

 supplemental

 coverage

Medicare HMOb

Medicaid

Type of coverage

 Out-of-pocket costs in dollars

689

1,056

1,392 1,369

1,255

1,103

755
Page 18 GAO-01-941 Medigap Insurance

requirements for health care services, including deductibles and

coinsurance for physicians and hospitals, in the absence of other

utilization control methods can result in increased utilization of

discretionary services and higher total expenditures. One study found that

Medicare beneficiaries with Medigap insurance had 28 percent more

outpatient visits and inpatient hospital days relative to beneficiaries who

did not have supplemental insurance, but were otherwise similar in terms

of age, gender, income, education, and health status.23 Service use among

beneficiaries with employer-sponsored supplemental insurance (which

often reduces, but does not eliminate, cost sharing and is typically

managed through other utilization control methods) was approximately 17

percent higher than the service use of beneficiaries with Medicare fee-forservice coverage only.

Medigap covers some health care expenses for policyholders but also

leaves substantial out-of-pocket costs in some areas, particularly for

prescription drugs. Our analysis of the 1998 MCBS shows that Medigap

paid about 13 percent of the $7,631 in average total health care

expenditures (including Medicare payments) for beneficiaries with

Medigap. Even with Medigap, beneficiaries still paid about 18 percent of

their total costs directly out of pocket, with prescription drugs being the

largest out-of-pocket cost. (See table 6.)

 23Sandra Christensen and Judy Shinogle, “Effects of Supplemental Coverage on Use of

Services by Medicare Enrollees,” Health Care Financing Review, Fall 1997. Other studies

have also found higher out-of-pocket costs or utilization by Medicare beneficiaries with

Medigap. See John A. Poisal and Lauren Murray, “Growing Differences Between Medicare

Beneficiaries With and Without Drug Coverage,” Health Affairs, March/April 2001 (Vol. 20,

No. 2, pp. 74-85) and David Gross and Normandy Brangan, “Out-of-Pocket Spending on

Health Care By Medicare Beneficiaries Age 65 and Older: 1999 Projections,” AARP Public

Policy Institute, December 1999.
Page 19 GAO-01-941 Medigap Insurance

Table 6: Expenditures by Payer for Beneficiaries With an Individually Purchased

Medigap Policy, 1998a

Type of service Medicare Medigap

Out-ofpocketOther

payersb

Total

costs

Inpatient hospital

care

$2,447

(89%)

$194

(7%)

$60

(2%)

$46

(2%)

$2,747

Physicians,

laboratories, and

other medical

providers

$1,396

(61%)

$422

(18%)

$353

(15%)

$129

(6%)

$2,300

Outpatient hospital

care

$443

(51%)

$261

(30%)

$109

(13%)

$58

(7%)

$871

Prescription drugs

• Medigap

policyholders

with prescription

drug coverage

• Medigap

policyholders

without

prescription

drug coverage

—c

—c

$239

27%)

—c

$548

(61%)

$618

(82%)

$105

(12%)

$129

(17%)

$893

$757

Other servicesd $589

(65%)

$37

(4%)

$259

(28%)

$27

(3%)

$912

Total

$4,876

(64%)

$996

(13%)

$1,376

(18%)

$383

(5%)

$7,631

a

Percentages may not add to 100 due to rounding.

b

Other payers may include uncollected liabilities or health care received through the Department of

Veterans Affairs, other public health plans, or private HMOs.

c

Expenditures were negligible (less than $10).

d

Other services include dental, home health, hospice, and short-term skilled nursing facility care, but

exclude long-term facility care services.

Source: GAO analysis of 1998 Medicare Current Beneficiary Survey.

Among Medigap policyholders with prescription drug coverage, Medigap

covered 27 percent ($239) of prescription drug costs, leaving the

beneficiary to incur 61 percent ($548) of the costs out of pocket.24 For

Medigap policyholders without drug coverage, beneficiaries incurred 82

 24Moreover, Medigap policyholders with prescription drug coverage had on average about

$136 higher total prescription drug costs, but spent 11 percent (or $70) less out of pocket

on prescription drugs, than those without prescription drug coverage. In addition, they paid

22 percent ($285) more in premiums for their Medigap policy than policyholders without

prescription drug coverage.
Page 20 GAO-01-941 Medigap Insurance

percent ($618) of prescription drug costs.25 Out-of-pocket costs for

prescription drugs were higher for Medigap policyholders than any other

group of Medicare beneficiaries, including those with employer-sponsored

supplemental coverage ($301). Higher out-of-pockets costs for

prescription drugs may be attributable to differences in supplemental

coverage. Medigap policyholders with prescription drug coverage have

high cost-sharing requirements (a $250 deductible and 50-percent

coinsurance with a maximum annual benefit of $1,250 or $3,000 depending

on the plan selected) in contrast to most employer-sponsored

supplemental plans that provide relatively comprehensive prescription

drug coverage. Employer-sponsored supplemental plans typically require

small copayments of $8 to $20 or coinsurance of 20 to 25 percent, and

provide incentives for enrollees to use selected, less costly drugs, such as

generic brands or those for which the plan has negotiated a discount.

Further, few employer-sponsored health plans have separate deductibles

or maximum annual benefits for prescription drugs.

As Congress continues to examine potential changes to the Medicare

program, it is important to consider the role that Medigap supplemental

coverage has on beneficiaries’ use of services and expenditures. Medicare

beneficiaries who purchase Medigap plans have coverage for essentially

all major Medicare cost-sharing requirements, including coinsurance and

deductibles. But offering this “first-dollar” coverage may undermine

incentives for prudent use of Medicare services, especially with regard to

discretionary services, which could ultimately increase costs for

beneficiaries and the entire Medicare program. While the lack of coverage

for outpatient prescription drugs through Medicare has led to various

proposals to expand Medicare benefits, relatively few beneficiaries

purchase standardized Medigap plans offering these benefits. Low

enrollment in these plans may be due to fewer plans being marketed with

these benefits, their relatively high cost, and the limited nature of their

prescription drug benefit, which still requires beneficiaries to pay more

than half of their prescription drug costs while receiving a maximum of

$3,000 in benefits. As a result, Medigap beneficiaries with prescription

drug coverage continue to incur substantial out-of-pocket costs for

prescription drugs and other health care services.

 25The remainder represents uncollected liabilities and payments from other sources, such

as private HMOs, state prescription drug programs, or public programs, such as coverage

through the Department of Veterans Affairs.

Concluding

Observations
Page 21 GAO-01-941 Medigap Insurance

We did not seek agency comments on this report because it does not focus

on agency activities. However, we shared a draft of this report with

experts in Medigap insurance at CMS and NAIC for their technical review.

We incorporated their technical comments as appropriate.

We will send copies of this report to the Administrator of CMS and other

interested congressional committees and members and agency officials.

We will also make copies available to others on request.

Please call me at (202) 512-7118 or John Dicken, Assistant Director, at

(202) 512-7043 if you have any questions. Rashmi Agarwal, Susan Anthony,

and Carmen-Rivera Lowitt also made major contributions to this report.

Kathryn G. Allen

Director, Health Care—-Medicaid

 and Private Health Insurance Issues
Page 22 GAO-01-941 Medigap Insurance

List of Congressional Committees

The Honorable Max Baucus

Chairman

The Honorable Charles E. Grassley

Ranking Minority Member

Committee on Finance

United States Senate

The Honorable Edward M. Kennedy

Chairman

The Honorable Judd Gregg

Ranking Minority Member

Committee on Health, Education, Labor and Pensions

United States Senate

The Honorable W.J. “Billy” Tauzin

Chairman

The Honorable John D. Dingell

Ranking Minority Member

Committee on Energy and Commerce

House of Representatives

The Honorable William M. Thomas

Chairman

The Honorable Charles B. Rangel

Ranking Minority Member

Committee on Ways and Means

House of Representatives
Appendix I: Methodology

Page 23 GAO-01-941 Medigap Insurance

To assess issues related to Medigap plan enrollment and premiums

incurred by beneficiaries who purchase Medigap plans, we analyzed data

collected on the National Association of Insurance Commisioners’ (NAIC)

1999 Medicare Supplement Insurance Experience exhibit. We also

analyzed the 1998 Medicare Current Beneficiary Survey (MCBS) to

examine out-of-pocket costs paid by Medicare beneficiaries with Medigap

policies. To assess the availability of Medigap plans across states and to

individuals who are not in their open-enrollment periods we examined

consumer guides for Medicare beneficiaries published by many states and

by the Health Care Financing Administration (HCFA). (Appendix II further

discusses our review of these consumer guides and the number of insurers

offering standardized Medigap plans.) Additionally, we interviewed

researchers and representatives from insurers, HCFA, NAIC, and several

state insurance regulators. We conducted our work from March 2001

through July 2001 in accordance with generally accepted government

auditing standards.

We relied on data collected on the NAIC’s 1999 Medicare Supplement

Insurance Experience Exhibit for information on Medigap enrollment by

plan type and premiums per covered life by plan type and across states.

Under federal and state statutes, insurers selling Medigap plans annually

file reports, known as the Medicare Supplement Insurance Experience

Exhibit, with the NAIC. NAIC then distributes the exhibit information to

the states. These exhibits are used as preliminary indicators, in

conjunction with other information, as to whether insurers meet federal

requirements that at least a minimum percentage of premiums earned are

spent on beneficiaries’ medical expenses, referred to as loss ratios.

Additionally, insurers report information on various aspects of Medigap

plans including plan type, premiums earned, the number of covered lives,

as well as other plan characteristic information and a contact for the

insurer. We relied on NAIC data containing filings as of December 31,

1999, for the 50 states and the District of Columbia. These data represent

policies in force as of 1999, including pre-standardized policies,

standardized policies, and policies for individuals living in three states in

which insurers are exempt from the federal standardized policies (i.e.,

Massachusetts, Minnesota, and Wisconsin).

An initial analysis of the 1999 data set revealed that several insurers failed

to include or did not designate a valid plan type on their filings. As part of

our data cleaning, we reclassified some of these filings to include or

correct the plan type based on information reported in other sections of

the insurance exhibit. We also called 37 insurers that covered more than

Appendix I: Methodology

Medicare Supplement

Insurance Experience

Exhibit
Appendix I: Methodology

Page 24 GAO-01-941 Medigap Insurance

5,000 lives and had not included a valid plan type on their filing.1 During

these calls, we asked for plan type information as well as verified whether

the insurer sold a Medicare Select plan that included incentives for

beneficiaries to use a network of health care providers, and corrected the

data in the database. After the data-cleaning process, approximately 8

percent of the 10.7 million2 covered lives still had an unknown plan type3

and less than 1 percent had missing information about whether the plan

was sold as a Medicare Select policy.

NAIC does not formally audit the data that insurers report, but it does

conduct quality checks before making the data publicly available. We did

not test the accuracy of the data beyond the data-cleaning steps mentioned

above. During our phone calls to insurers, we found that some insurers

failed to report separate filings for the various Medigap plan types they sell

and instead reported aggregate information across multiple plan types.

Since plan type information was unavailable for these plans, information

for these insurers was excluded from our estimates of enrollment and

premium estimates for standardized plans.

We relied on HCFA’s 1998 MCBS for information on expenditures for

health care services by payer for Medicare beneficiaries. Specifically, we

examined (1) the out-of-pocket costs incurred by beneficiaries with a

Medigap plan in comparison to other beneficiaries4

 and (2) the out-ofpocket costs for beneficiaries with a Medigap plan as a share of total

 1

We were unable to call two insurers because the NAIC data did not provide sufficient

contact information for the insurer.

2

The 10.7 million covered lives that we calculated exclude the following: (1) information

not available to us from 2 insurers representing 5,744 covered lives and (2) all filings that

reported information on covered lives but not premiums, or reported premiums but not

covered lives. These filings lacking either covered lives or premium information represent

10,847 lives (including a single insurer with 10,651 lives enrolled in plan A in Kentucky) and

$61 million in premiums earned. We excluded these filings to prevent them from distorting

estimated premiums per covered life by plan type across states.

3

We also found that a plan type only applicable in states exempt from the federal standards

was being reported in states other than the three exempt states. Some of these filings may

have reflected beneficiaries moving from exempt states to other states. The insurer may

have misreported the plan type or reported the state of residence instead of the state of

issue. We placed these policies into the unknown plan type category since the insurer may

have misreported for that filing.

4

The MCBS does not contain information on expenditures for beneficiaries by Medigap

plan type.

Medicare Current

Beneficiary Survey

(MCBS)
Appendix I: Methodology

Page 25 GAO-01-941 Medigap Insurance

expenditures for health care services, including payments by Medicare and

other payers. The MCBS is a multipurpose survey of a representative

sample of the Medicare population. The 1998 MCBS collected information

on a sample of 13,024 beneficiaries, representing about a 72-percent

response rate. Because the MCBS is based on a sample, any estimates

derived from the survey are subject to sampling errors. A sampling error

indicates how closely the results from a particular sample would be

reproduced if a complete count of the population were taken with the

same measurement methods. To minimize the chances of citing

differences that could be attributable to sampling errors, we highlight only

those differences that are statistically significant at the 95-percent

confidence level.

We analyzed the MCBS’ cost-and-use file representing persons enrolled in

Medicare as of January 1, 1997, and 1998. The cost-and-use file contains a

combination of survey-reported data from the MCBS and Medicare claims

and other data from HCFA administrative files. The survey also collects

information on services not covered by Medicare, including prescription

drugs and long-term facility care. HCFA notes that there may be some

underreporting of services and costs by beneficiaries.5

 To compensate in

part for survey respondents who may not know how much an event of

care costs or how the event was paid for, HCFA used Medicare

administrative data to adjust or supplement survey responses for some

information, including cost information. We did not verify the accuracy of

the information in the computerized file.

Because some Medicare beneficiaries may have supplemental coverage

from several sources, we prioritized the source of insurance individuals

reported to avoid double counting. That is, if individuals reported having

coverage during 1998 from two or more kinds of supplemental coverage,

we assigned them to one type to estimate enrollment and costs without

including the same individuals in multiple categories. We initially

separated beneficiaries enrolled in a health maintenance organization

(HMO) contracting with the Medicare program (a Medicare HMO) from

beneficiaries in the traditional fee-for-service Medicare program. Then, we

used the following hierarchy of supplemental insurance categories: (1)

employer-sponsored, (2) individually purchased (that is, a Medigap policy)

with prescription drug coverage, (3) individually purchased without

 5

In particular, HCFA notes that prescription drug and ancillary service cost information for

persons in long-term care facilities may not be complete.
Appendix I: Methodology

Page 26 GAO-01-941 Medigap Insurance

prescription drug coverage, (4) private HMO, (5) Medicaid, and (6) other

public health plans (including coverage through the Department of

Veterans Affairs and state-sponsored drug plans). Finally, those without

any supplemental coverage were categorized as having Medicare fee-forservice only. For example, a beneficiary with Medicare HMO coverage

sponsored by an employer would be included within the Medicare HMO

category. Table 7 shows the number and percent of beneficiaries in each

insurance category.

Table 7: Number and Percent of Beneficiaries by Insurance Category, 1998

Insurance category

Number of beneficiaries

(in millions)

Percent of

beneficiaries

Medicare HMO 7.1 18

Employer-sponsored 12.8 32

Medigap with prescription drug

coverage

 2.9 7

Medigap without prescription

drug coverage

 6.2 15

Private HMO 1.7 4

Medicaid 5.5 14

Other public 0.6 1

Fee-for-service Medicare only 3.3 8

Total 40.0

Note: Percents may not add to 100 due to rounding.

Source: GAO analysis of 1998 MCBS.
Appendix II: Insurers Offering Standardized

Medigap Plans During Open-Enrollment

Periods

Page 27 GAO-01-941 Medigap Insurance

Table 8 shows the extent to which health insurers offer the 10

standardized Medigap policies to 65-year-olds during the initial openenrollment period. The table lists information for 47 states and the District

of Columbia where insurers sell these plans. Three states—Massachusetts,

Minnesota, and Wisconsin—are not included in the table because insurers

in these states are exempt from federal Medigap standardized

requirements.

To determine the extent to which Medigap standardized plans are

available in each state, we primarily relied on state consumer guides and

information available from the Health Care Financing Administration’s

(HCFA) web site. For states that did not have available information in

consumer guides or Internet sites, we obtained information from their

state insurance departments and insurers. We also contacted state

insurance departments and insurers to verify state consumer guide

information for states reporting three or fewer insurers offering any plan

type to ensure that we did not understate the availability of Medigap plans

in these states. Information from consumer guides and HCFA data may not

contain comprehensive data on insurers operating in a state at a given

point in time because (1) in some states, insurers voluntarily submit data

to insurance departments and do not always report on the Medigap

policies they offer and (2) data may not reflect recent changes such as

companies that stop selling a product or new insurers that the states

certify to sell Medigap plans. Also, in some states, such as Michigan, some

insurers may be licensed to sell Medigap in the state but are not actively

marketing the plan to new enrollees. We did not independently confirm

information reported by state insurance departments and insurers.

Appendix II: Insurers Offering Standardized

Medigap Plans During Open-Enrollment

Periods
Appendix II: Insurers Offering Standardized

Medigap Plans During Open-Enrollment

Periods

Page 28 GAO-01-941 Medigap Insurance

Table 8: Number of Insurers Offering Standardized Medigap Policies by Plan Type

and by State to 65-Year-Olds in Their Initial Open-Enrollment Period

Plan type

ABCDEFGH I J

Alabama 19 15 18 9 5 17 8 4 5 5

Alaska 15 8 12 9 4 15 8 3 5 5

Arizona 31 16 29 17 6 29 12 6 6 5

Arkansas 47 35 45 24 13 46 22 7 12 6

California 18 13 17 10 4 18 8 5 6 4

Colorado 41 27 35 17 10 39 19 6 8 7

Connecticut 15 10 12 11 4 15 6 5 5 4

Delaware 17 17 17 13 5 16 5 0 4 2

District of

Columbia

9686394232

Florida 38 27 30 17 13 34 19 7 13 5

Georgia 28 21 26 16 5 28 9 3 6 4

Hawaii 25 14 20 12 9 21 14 8 8 9

Idahoa 15 8 10 6 6 11 7 7 9 10

Illinois 41 25 35 21 9 40 14 4 8 7

Indiana 44 28 41 25 10 44 20 8 8 7

Iowa 37 24 33 21 10 37 16 5 8 7

Kansas 45 29 40 17 8 40 15 6 10 7

Kentucky 38 32 36 24 12 37 15 9 8 9

Louisiana 21 16 20 14 6 21 13 3 3 4

Maine 13 10 11 9 6 13 7 4 5 3

Maryland 23 15 16 10 8 21 12 4 5 5

Michigan 98 30 98 25 11 38 15 9 11 8

Mississippi 10 7 10 7 4 9 7 2 2 2

Missouri 43 28 39 23 9 42 20 9 10 6

Montana 24 13 24 11 7 24 13 5 6 6

Nebraska 35 26 34 20 7 35 15 7 7 6

New Hampshire 17 10 16 9 6 17 10 4 5 4

New Jersey 7 5 7 5 3 7 4 2 3 2

New Mexico 62 48 59 32 18 56 27 10 20 10

Nevada 26 20 24 15 7 24 11 5 7 5

New York 16 16 13 7 4 10 7 8 4 1

North Carolina 27 20 25 15 6 25 12 2 6 4

North Dakota 36 23 35 23 8 36 16 6 7 6

Ohio 35 25 33 20 11 33 16 7 11 5

Oklahoma 42 28 39 23 11 41 18 9 11 9

Oregon 27 16 25 13 6 26 12 5 10 7

Pennsylvania 46 46 44 24 14 11 7 17 6 7

Rhode Island 10 7 9 5 2 9 6 1 1 1

South Carolina 29 20 27 16 5 29 12 3 3 3
Appendix II: Insurers Offering Standardized

Medigap Plans During Open-Enrollment

Periods

Page 29 GAO-01-941 Medigap Insurance

Plan type

ABCDEFGH I J

South Dakota 26 16 25 11 6 25 11 4 5 5

Tennessee 50 35 48 25 12 50 23 11 12 11

Texas 46 32 42 28 10 46 19 9 9 8

Utah 30 24 30 20 10 31 17 6 8 7

Vermont 16 11 15 10 8 0 0 7 0 4

Virginia 34 26 31 19 8 33 11 5 8 7

Washington 30 15 26 11 10 27 9 4 11 5

West Virginia 34 21 32 15 9 34 14 3 8 5

Wyoming 36 22 36 18 8 35 15 7 11 7

Median 30 20 27 16 8 28 12 5 7 5

a

For Idaho, the state insurance department confirmed the number of insurers offering plans H, I, and

J. Other carriers may also offer plans A through G, but this information was not readily available.

Note: This table does not include Massachusetts, Minnesota, and Wisconsin because insurers in

these states are exempt from the standardized plans. Our review of information from these states’

insurance departments indicates that multiple insurers also offer Medigap policies in these states.

Source: GAO review of most recently available state consumer guides, generally representing

policies offered in 2000 or 2001. For certain states, including those that did not have a consumer

guide or whose consumer guides identified three or fewer Medigap insurers, we obtained additional

information from HCFA, state insurance departments, and insurers.
Appendix III: Average Annual Premiums by

State

Page 30 GAO-01-941 Medigap Insurance

Table 9 presents information from the National Association of Insurance

Commissioners’ (NAIC) 1999 Medicare Supplement Insurance Experience

Exhibit on premiums per covered life for standardized Medigap plans

among the states and the District of Columbia offering the federally

standardized Medigap plans. Nationally, the average premium per covered

life in 1999 for the standardized plans was $1,185, and ranged from $706 in

Utah to $1,600 in California.

Table 9: Average Annual Premiums Per Covered Life by State, 1999

State

Premiums per covered life for

standardized plans A-J

(dollars)

Percent difference from

national average for

standardized plans A-J

California 1,600 35.0

New York 1,509 27.3

Florida 1,507 27.2

Texas 1,404 18.5

Rhode Island 1,376 16.1

Louisiana 1,369 15.5

Connecticut 1,351 14.0

Ohio 1,351 13.9

Nevada 1,334 12.6

District of Columbia 1,329 12.1

Arizona 1,301 9.7

Mississippi 1,295 9.2

Michigan 1,291 8.9

Illinois 1,289 8.7

Colorado 1,269 7.0

Georgia 1,265 6.7

West Virginia 1,260 6.3

Missouri 1,258 6.1

Oklahoma 1,248 5.3

Tennessee 1,243 4.9

Washington 1,243 4.8

Kansas 1,241 4.7

Idaho 1,234 4.1

Indiana 1,233 4.0

Virginia 1,212 2.2

North Carolina 1,201 1.3

Alaska 1,201 1.3

South Carolina 1,185 0.0

U.S. average 1,185 0.0

Maine 1,166 -1.6

Oregon 1,163 -1.9

Alabama 1,162 -2.0

Appendix III: Average Annual Premiums by

State
Appendix III: Average Annual Premiums by

State

Page 31 GAO-01-941 Medigap Insurance

State

Premiums per covered life for

standardized plans A-J

(dollars)

Percent difference from

national average for

standardized plans A-J

Nebraska 1,161 -2.1

Kentucky 1,149 -3.1

New Mexico 1,145 -3.4

Wyoming 1,136 -4.2

Maryland 1,129 -4.7

Iowa 1,125 -5.1

South Dakota 1,121 -5.5

Arkansas 1,104 -6.9

North Dakota 1,090 -8.1

Hawaii 1,079 -9.0

Delaware 1,060 -10.6

Vermont 960 -19.0

Pennsylvania 891 -24.8

New Hampshire 762 -35.7

New Jersey 729 -38.5

Utah 706 -40.4

Notes: Percent difference may be different for the same premium amount in different states due to

rounding. Excludes data for Montana because of problems with data reported by a large insurer in the

state. Insurers in Massachusetts, Minnesota, and Wisconsin are exempt from offering the

standardized plans because these states standardized their plans prior to the establishment of the

federal standardized plans. The average premium per covered life was $1,922 in Massachusetts,

$1,377 in Minnesota, and $1,264 in Wisconsin.

Source: GAO analysis of data collected on NAIC’s 1999 Medicare Supplement Insurance Experience

Exhibit.
Related GAO Products

Page 32 GAO-01-941 Medigap Insurance

Medicare: Cost-Sharing Policies Problematic for Beneficiaries and

Program (GAO-01-713T, May 9, 2001)

Retiree Health Benefits: Employer-Sponsored Benefits May Be Vulnerable

to Further Erosion (GAO-01-374, May 1, 2001)

Medicare+Choice: Plan Withdrawals Indicate Difficulty of Providing

Choice While Achieving Savings (GAO/HEHS-00-183, Sept. 7, 2000)

Medigap: Premiums for Standardized Plans That Cover Prescription Drugs

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Prescription Drugs: Increasing Medicare Beneficiary Access and Related

Implications (GAO/T-HEHS/AIMD-00-100, Feb. 16, 2000)

Medigap Insurance: Compliance With Federal Standards Has Increased

(GAO/HEHS-98-66, Mar. 6, 1998)

Medigap Insurance: Alternatives for Medicare Beneficiaries to Avoid

Medical Underwriting (GAO/HEHS-96-180, Sept. 10, 1996)

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(290040)
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