Testimony

Before the Subcommittee on Health, Committee on

Ways and Means, House of Representatives

United States General Accounting Office

GAO

For Release on Delivery

Expected at 2:00 p.m.

Wednesday, May 9, 2001 MEDICARE

Cost-Sharing Policies

Problematic for

Beneficiaries and Program

Statement of William J. Scanlon

Director, Health Care Issues

GAO-01-713T
Page 1 GAO-01-713T

Madam Chairwoman and Members of the Subcommittee:

I am pleased to be here today as you consider the need to modernize and

strengthen the Medicare program and review the role of supplemental

“Medigap” policies that many seniors buy to help improve their Medicare

coverage. Medicare provides valuable and extensive coverage for

beneficiaries’ health care needs. Nevertheless, recent discussions have

underscored the significant gaps that leave some beneficiaries vulnerable

to sizeable financial burdens from out-of-pocket costs. Most beneficiaries

have additional supplemental coverage that helps to fill Medicare’s

coverage gaps and pay some out-of-pocket expenses. Privately purchased

Medigap is an important source of this supplemental coverage because it

is widely available to beneficiaries. The other sources—employersponsored policies, Medicare+Choice plans, and Medicaid programs—are

not as widely available to all beneficiaries. However, concerns exist that

supplemental coverage can be expensive and may undermine the

legitimate role of cost sharing in a health insurance plan—to encourage

cost-effective use of services.

To assist the Subcommittee as it considers proposals to improve coverage

for beneficiaries and the financial health of the Medicare program, my

remarks today focus on the design of Medicare’s benefit package and the

role of private supplemental coverage. Specifically, I will discuss (1)

beneficiaries’ potential financial liability under Medicare’s current benefit

structure and cost-sharing requirements, (2) the cost of Medigap policies

and the extent to which they provide additional coverage, and (3)

concerns that Medigap’s so-called “first dollar” coverage undermines the

cost control incentives of Medicare’s cost-sharing requirements. My

comments are based on our prior and ongoing work1

 on Medicare and

Medigap as well as other published research.

In summary, Medicare’s benefits package and cost-sharing requirements

leave beneficiaries liable for high out-of-pocket costs. As currently

structured, Medicare provides no limit on out-of-pocket spending and no

coverage for most outpatient prescription drugs—a component of medical

care that is of growing importance in treatment and rapidly increasing in

cost. At the same time, Medicare’s cost-sharing requirements are poorly

targeted and fail to promote prudent use of services.

 1

The Consolidated Appropriations Act of 2000 mandated that we report to the Congress by

July 2001 on various aspects of Medigap coverage.
Page 2 GAO-01-713T

Medigap policies that many Medicare beneficiaries purchase help to fill in

some of Medicare’s gaps but are themselves problematic. Premiums paid

for Medigap policies averaged $1,300 in 1999, with 20 percent going to

administrative costs. While these policies pay for some or all Medicare

cost-sharing requirements, they do not fully protect beneficiaries from

potentially significant out-of-pocket costs. In particular, some Medigap

policies offer prescription drug coverage, however, this coverage can be

inadequate because beneficiaries still pay most of the cost and the

maximum Medigap benefit is capped. In addition, Medigap first-dollar

coverage eliminates the effect Medicare’s cost-sharing requirements could

have to promote prudent use of services. The danger is that some services

may be overused—ultimately increasing costs for beneficiaries and the

Medicare program.

Individuals who are eligible for Medicare automatically receive Hospital

Insurance (HI), known as part A, which helps pay for inpatient hospital,

skilled nursing facility, hospice, and certain home health care services.

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

deductibles, coinsurance, and copayment amounts. (See table 1.) Medicare

eligible beneficiaries may elect to purchase Supplementary Medical

Insurance (SMI), 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.2

 Beneficiaries are

also responsible for part B deductibles, coinsurance, and copayments.

 2

The premium amount is adjusted each year so that expected premium revenues equal 25

percent of expected part B spending.

Background
Page 3 GAO-01-713T

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

Part A Coverage Beneficiary copayments, coinsurance, and deductibles

Inpatient hospital $792 deductible per admissiona

$198 copayment per day for days 61-90

$396 copayment per day for days 91-150b

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 Coveragec

Physician and medical $100 deductible each 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 Coinsurance 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

After the first 90 days of inpatient care, Medicare may help pay for an additional 60 days of inpatient

care (days 91-150). Each beneficiary is entitled to a lifetime reserve of 60 days of inpatient coverage.

Each reserve day may be used only once in a beneficiary's lifetime.

 cNo cost-sharing is required for certain preventive services—including specific screening tests for

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

Source: Medicare & You 2001, Health Care Financing Administration.

Most Medicare beneficiaries have some type of supplemental coverage to

help pay for Medicare cost-sharing requirements as well as some benefits

not covered by Medicare. They obtain this coverage either through

employers, Medicare+Choice plans, state Medicaid programs, or Medigap

policies sold by private insurers.

About one-third of Medicare’s 39 million beneficiaries have employersponsored supplemental coverage. These benefits typically pay for some

or all of the costs not covered by Medicare, such as coinsurance,

deductibles, and prescription drugs. However, many beneficiaries do not

have access to employer-sponsored coverage. A recent survey found that

more than 70 percent of large employers with at least 500 employees did
Page 4 GAO-01-713T

not offer these health benefits to Medicare-eligible retirees.3 Small

employers are even less likely to offer retiree health benefits.

Approximately 15 percent of Medicare beneficiaries enroll in

Medicare+Choice plans, which include health maintenance organizations

and other private insurers who are paid a set amount each month to

provide all Medicare-covered services. These plans typically offer lower

cost-sharing requirements and additional benefits compared to Medicare’s

traditional fee-for-service program, in exchange for a restricted choice of

providers. However, Medicare+Choice plans are not available in all parts

of the country. As of February 2001, about a third of all beneficiaries lived

in counties where no Medicare+Choice plans were offered.

About 17 percent of Medicare beneficiaries receive assistance from

Medicaid, the federal-state health financing program for low-income aged

and disabled individuals. All Medicare beneficiaries with incomes below

the federal poverty level can have their Medicare premiums and cost

sharing paid for by Medicaid. Beneficiaries with incomes slightly above the

poverty level may have all or part of their Medicare premium paid for by

Medicaid. Also, some low-income individuals may be entitled to full

Medicaid benefits (so called “dual eligibles”), which include coverage for

certain services not available through Medicare, such as outpatient

prescription drugs. However, the income level at which beneficiaries

qualify for full Medicaid benefits varies, as determined by each state, and

many Medicare beneficiaries with low incomes may not qualify.4

Medigap is the only supplemental coverage option available to all

beneficiaries when they initially enroll in Medicare at age 65 or older.

Medigap policies are offered by private insurance companies in

accordance with state and federal insurance regulations. In 1999, more

 3

Mercer/Foster Higgins National Survey of Employer-sponsored Health Plans 2000

William M. Mercer, Incorporated (New York, New York).

4

In addition, many low-income beneficiaries who are eligible for Medicaid and other

federal/state programs to provide assistance with premiums and cost-sharing requirements

may not enroll, in part due to limited awareness of these programs and the administrative

complexity of demonstrating eligibility. See Low-Income Medicare Beneficiaries: Further

Outreach and Administrative Simplification Could Increase Enrollment

(GAO/HEHS-99-61, April 9, 1999). Aiming to increase awareness and enrollment in these

programs, the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of

2000 directed the Social Security Administration to identify and notify potentially eligible

individuals and the Department of Health and Human Services to develop and distribute to

states a simplified uniform enrollment application.
Page 5 GAO-01-713T

than 10 million individuals—more than one-fourth of all beneficiaries—

were covered by Medigap policies.5

 The Omnibus Budget Reconciliation

Act (OBRA) of 19906

 required that Medigap policies be standardized and

allowed a maximum of 10 different benefit packages offering varying

levels of supplemental coverage to be provided. All policies sold since July

31, 1992 have offered one of the 10 standardized packages, known as plans

A through J. (See table 2.) Policies sold prior to this time were not

required to comply with the standard benefit package requirements.

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

X X X X XX X X X X

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 billingbX X XX

Foreign travel emergency X X X X X X X X

Home health care X X X X

Prescription drugs XcXcXd

Preventive medical care X X

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

Note: This chart does not apply in Massachusetts, Minnesota, and Wisconsin, where alternative

standards exist.

a

Plans F and J also have a high deductible option of $1,580, under which beneficiaries also pay

deductibles for prescriptions ($250 per year for Plan J) and foreign travel emergency ($250 per year

for Plans F and J).

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.

d

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

 5

The National Association of Insurance Commissioners (NAIC) reports that Medigap

enrollment has declined from about 14 million in 1994.

6

P.L. 101-508, Nov. 5, 1990.
Page 6 GAO-01-713T

Under OBRA 1990, Medicare beneficiaries are guaranteed access to

Medigap policies within 6 months of enrolling in part B regardless of their

health status. Subsequent laws have added guarantees for certain other

beneficiaries. Beneficiaries who enrolled in a Medicare+Choice plan when

first becoming eligible for Medicare and then leave the plan within one

year are also guaranteed access to any Medigap policy; those who

terminated their Medigap policy to join a Medicare+Choice plan can return

to their previous policy or, if the original policy is not available, be

guaranteed access to plans A, B, C, or F. Also, individuals whose

employers eliminate retiree benefits or whose Medicare+Choice plans

leave the program or stop serving their areas are guaranteed access to

these 4 standardized Medigap policies. However, none of these 4

guaranteed policies include prescription drug coverage.7

 Otherwise,

insurers can either deny coverage or charge higher premiums to

beneficiaries who are older or in poorer health.

Medicare’s design has changed little since its inception 35 years ago, and

in many ways has not kept pace with changing health care needs and

private sector insurance practices. Medicare cost-sharing requirements are

not well designed to discourage unnecessary use of services. At the same

time, they can create financial barriers to care. In addition, the lack of a

cost-sharing limit can leave some beneficiaries with extensive health care

needs liable for very large Medicare expenses. Moreover, gaps in

Medicare’s benefit package can contribute to substantial financial burdens

on beneficiaries who lack supplemental insurance or Medicaid coverage.

Health insurers commonly design cost-sharing provisions—in the form of

deductibles, coinsurance, and copayments—to ensure that beneficiaries

are aware there is a cost associated with the provision of services and to

encourage them to use services prudently. Ideally, cost sharing should

encourage beneficiaries to evaluate the need for discretionary care but not

discourage necessary care. Optimal cost-sharing designs would generally

require coinsurance or copayments for services that may be discretionary

 7

These protections were added by section 4003 of the Balanced Budget Act of 1997 (P.L.

105-33, 111 Stat. 330). In addition to these federal protections, 21 states provide for

additional Medigap protections in 2000.

Medicare CostSharing Requirements

And Benefit Design

Are Out Of Step With

Current Private

Sector Practices

Medicare’s Cost-Sharing

Requirements Not Well

Structured
Page 7 GAO-01-713T

and could potentially be overused, and would also aim to steer patients to

lower cost or better treatment options. Care must be taken, however, to

avoid setting cost-sharing amounts so high as to create financial barriers

to necessary care.

The benefit packages of Medicare+Choice plans illustrate cost-sharing

arrangements that have been designed to reinforce cost containment and

treatment goals. Most Medicare+Choice plans charge a small copayment

for physician visits ($10 or less) and emergency room services (less than

$50). Relatively few Medicare+Choice plans charge copayments for

hospital admissions. Plans that offer prescription drug benefits typically

design cost-sharing provisions that encourage beneficiaries to use cheaper

generic drugs or brand name drugs for which the plan has negotiated a

discount.

Medicare fee-for-service cost-sharing rules diverge from these common

insurance industry practices in important ways. For example, as indicated

in table 1, Medicare imposes a relatively high deductible for hospital

admissions, which are rarely optional. In contrast, Medicare requires no

cost sharing for home health care services, even though historically high

utilization growth and wide geographic disparities in the use of such

services have raised concerns about the potentially discretionary nature of

some services.8

 Medicare also has not increased the part B deductible

since 1991. For the last 10 years the deductible has remained constant at

$100 and has thus steadily decreased as a proportion of beneficiaries’ real

income.

Also unlike most employer-sponsored plans for active workers, Medicare

does not limit beneficiaries’ cost-sharing liability, which can represent a

significant share of their personal resources. Premiums, deductibles,

coinsurance, and copayments that beneficiaries are required to pay for

services that Medicare covers equaled an estimated 23 percent of total

Medicare expenditures in 2000. The average beneficiary who obtained

services in 1997 had a total liability of $1,451, consisting of $925 in

Medicare copayments and deductibles in addition to the $526 in annual

part B premiums required that year.

 8

See Medicare Home Health Care: Prospective Payment System Will Need Refinement as

Data Become Available (GAO/HEHS-00-9, Apr. 2000).

Medicare Does Not Limit

Beneficiaries’ Cost-Sharing

Liability
Page 8 GAO-01-713T

The burden of Medicare cost sharing can be much higher, however, for

beneficiaries with extensive health care needs. In 1997, the most current

year of available data on the distribution of these costs, slightly more than

3.4 million beneficiaries (11.4 percent of beneficiaries who obtained

services) were liable for more than $2,000. Approximately 750,000 of these

beneficiaries (2.5 percent) were liable for more than $5,000, and about

173,000 beneficiaries (0.6 percent) were liable for more than $10,000. In

contrast, private employer-sponsored health plans typically limit

maximum annual out-of-pocket costs for covered services to less than

$2,000 per year for single coverage.9

Medicare does not cover some services that are commonly included in

private insurers’ benefit packages. The most notable omission in

Medicare’s benefit package is coverage for outpatient prescription drugs.

This benefit is available to most active workers enrolled in employersponsored plans. More than 95 percent of private employer-sponsored

health plans for active workers cover prescription drugs, typically

providing comprehensive coverage with relatively low cost-sharing

requirements.

Current estimates suggest that the combination of Medicare’s cost-sharing

requirements and limited benefits leaves about 45 percent of beneficiaries’

health care costs uncovered. The average beneficiary in 2000 is estimated

to have incurred about $3,100 in out-of-pocket expenses for health care—

an amount equal to about 22 percent of the average beneficiary’s income.10

Some beneficiaries potentially face much greater financial burdens for

health care expenses. For example, elderly beneficiaries in poor health

and with no Medicaid or supplemental insurance coverage are estimated

to have spent 44 percent of their incomes on health care in 2000. Lowincome single women over age 85 in poor health and not covered by

Medicaid are estimated to have spent more than half (about 52 percent) of

their incomes on health care services.11 These percentages are expected to

 9

The Kaiser Family Foundation and Health Research and Educational Trust, Employer

Health Benefits: 2000 Annual Survey.

10Stephanie Maxwell, Marilyn Moon, and Mesha Segal, Growth in Medicare and Out-OfPocket Spending: Impact on Vulnerable Beneficiaries, (Urban Institute, Dec. 2000).

11Maxwell, Moon, and Segal.

Cost of Uncovered

Services Adds to

Beneficiaries’ Financial

Burden
Page 9 GAO-01-713T

increase over time as Medicare premiums and costs for prescription drugs

and other health care goods and services rise faster than incomes.

While more than one-fourth of beneficiaries have Medigap policies to fill

Medicare coverage gaps, these policies can be expensive and provide only

limited protection from catastrophic expenses. Medigap drug coverage in

particular offers only limited protection because of high cost sharing and

low coverage caps.

More than 10 million Medicare beneficiaries have Medigap policies to

cover some potentially high costs that Medicare does not pay, including

cost-sharing requirements, extended hospitalizations, and some

prescription drug expenses. By offering a choice among standardized

plans, beneficiaries can match their coverage needs and financial

resources with plan coverage. Medigap policies are widely available to

beneficiaries including those who are not eligible for or do not have access

to other insurance to supplement Medicare, such as Medicaid or employersponsored retiree benefits. In fact, most Medicare beneficiaries who do

not otherwise have employer-sponsored supplemental coverage, Medicaid,

or Medicare+Choice plans purchase a Medigap policy, demonstrating the

value of this coverage to the Medicare population.

Medigap policies can be expensive. The average annual Medigap premium

was more than $1,300 in 1999. Premiums varied widely based on the level

of coverage purchased. 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. The most comprehensive plans—I and J—were the most

expensive, with average premiums around $1,700. (See table 3.)

Medigap Policies

Address Some

Medicare

Shortcomings But Are

Expensive

Medigap Fills Some Needs

Medigap Policies Can Have

High Cost
Page 10 GAO-01-713T

Table 3: Distribution of Medigap Plans and Annual Premiums Per Covered Life,

1999

Medigap plan

Covered lives

(percentage)

Average annual premium

earned per covered life

A 2.7 $877

B 8.0 $1,093

C 15.9 $1,151

D 3.8 $1,032

E 1.5 $1,067

F 23.4 $1,217

G 1.5 $980

H 1.5 $1,379

I 1.5 $1,704

J 2.7 $1,669

Pre-standard (policies originally sold

before July 31, 1992)

 32.9 $1,573

Plans in states exempt from plan

standardsa

 4.5 $1,405

Totalb100.0 $1,322

a

Massachusetts, Minnesota, and Wisconsin have alternative plans in effect and waivers that exempt

them from selling the national standard Medigap plans.

b

Data reported by insurers to NAIC do not include plan type for policies representing less than 9

percent of Medigap policy covered lives, with an average paid premium of $1,016. These plans are

not included in the plan distribution or average premiums reported in the table.

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

Experience Exhibit.

Premiums also vary widely across geographic areas and insurers. For

example, average annual premiums in Massachusetts ($1,915) were 45

percent higher than the national average. While varying average premiums

may reflect geographic differences in terms of use of Medicare and

supplemental services and costs, beneficiaries in the same state may face

widely varying premiums for a given plan type offered by different

insurers. For example, in Nevada, plan A premiums for a 65-year-old

ranged from $446 to as much as $1,004, depending on the insurer.

Similarly, in Florida, plan F premiums for a 65-year-old male ranged from

$1,548 to $2,123; and in Maine, plan J premiums ranged from $2,697 to

$3,612.12

 12Premium quotes for policies available in 2000 and 2001 from most recently available state

guides for consumers on Medigap policies.
Page 11 GAO-01-713T

Medigap policies are becoming more expensive. One recent study reports

that premiums for the three Medigap plan types offering prescription drug

coverage (H, I, and J) have increased the most rapidly—by 17 to 34

percent in 2000. Medigap plans without prescription drug coverage rose by

4 to 10 percent in 2000.13

A major reason premiums are high is that a large share of premium dollars

are used for administrative costs rather than benefits. More than 20 cents

from each Medigap premium dollar is spent for costs other than medical

expenses, including administration. Administrative costs are high, in part,

because nearly three-quarters of policies are sold to individuals rather

than groups.14 The share of premiums spent on benefits varies significantly

among carriers. The 15 largest sellers of Medigap policies spent between

64 and 88 percent of premiums on benefits in 1999. The share of premiums

spent on benefits is lower for Medigap plans than either typical

Medicare+Choice plans or health benefits for employees of large

employers. Also, 98 percent of Medicare fee-for-service funds are used for

benefits.

While Medigap policies cover some costs beneficiaries would otherwise

pay out of pocket, Medigap policies have limits and can still leave

beneficiaries exposed to significant out-of-pocket costs. Medigap

prescription drug coverage in particular leaves beneficiaries exposed to

substantial financial liability. Prescription drugs are of growing

importance in medical treatment and one of the fastest growing

components of health care costs. Medigap policies with a drug benefit are

the most expensive yet the benefit offered can be of limited value to many

beneficiaries. For example,

• Medigap policies offering drug coverage typically cost much more than

policies without drug coverage—the most popular plan with prescription

drug coverage (plan J) costs on average $450 more than the most popular

plan without drug coverage (plan F)—although the benefit is at most

$1,250 or $3,000, depending on plan type, and

 13Weiss Ratings, “Prescription Drug Costs Boost Medigap Premiums Dramatically,” March

26, 2001, at

http://www.weissratings.com/NewsReleases/Ins_Medigap/20010326Medigap.htm.

14Federal law requires Medigap plans to spend at least 65 percent of premiums on benefits

for policies sold to individuals, and 75 percent for policies sold to groups.

Remaining Gaps Leave

Beneficiaries at Significant

Risk
Page 12 GAO-01-713T

• under the Medigap plan with the most comprehensive drug coverage, type

J, a beneficiary would have to incur $6,250 in prescription drug costs to get

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

requirements.

The high cost and limited benefit may explain why more than 90 percent of

beneficiaries with one of the standardized Medigap plans purchased

standard Medigap plans that do not include drug benefits.15 Further,

Medicare beneficiaries who do not purchase Medigap policies when they

initially enroll in part B at age 65 or older are not guaranteed access to the

Medigap policies with prescription drug coverage in most states. Insurers

may then either deny coverage or charge higher premiums, especially to

Medicare beneficiaries with any adverse health conditions.

The Medigap standard prescription drug benefit differs greatly from that

typically offered by employer-sponsored plans for active employees or

Medicare-eligible retirees. The Medigap prescription drug benefit has a

$250 deductible, requires 50 percent coinsurance, and is limited to $1,250

or $3,000 depending on the plan purchased. In contrast, employersponsored plans typically require small copayments of $8 to $20 or

coinsurance of about 20 to 25 percent, depending on whether the enrollees

purchase generic brands, those for which the plan has negotiated a price

discount, or other drugs. Further, few employer-sponsored health plans

have separate deductibles or maximum annual benefits for prescription

drugs. These plans may also offer enrollees access to discounted prices

the plans have negotiated even when the beneficiary is paying the entire

cost.

Even though Medicare’s original design has been criticized as outmoded, it

included various cost-sharing requirements intended to encourage prudent

use of services. These requirements have also traditionally been features

of private insurance. However, Medigap’s first-dollar coverage—the

elimination of any deductibles or coinsurance associated with the use of

specific services—undermines this objective. All standard Medigap plans

 15While less is known about the benefits offered by prestandardized plans that were sold

prior to 1992—representing about 30 percent of Medigap enrollment in 1999—one expert

estimated that most are likely to have some coverage for prescription drugs but that this

coverage is even more limited than that offered by the standardized plans. See Deborah J.

Chollet, Mathematica Policy Research Inc., “Medigap Coverage for Prescription Drugs,”

Testimony before the U.S. Senate Committee on Finance, April 24, 2001.

First-Dollar Coverage

Through Medigap

Distorts Medicare's

Cost Control Features
Page 13 GAO-01-713T

cover hospital and physician coinsurance, while nearly all beneficiaries

with standardized Medigap plans purchase plans covering the full hospital

deductible, and most purchase plans covering the full skilled nursing home

coinsurance and part B deductible. First-dollar coverage reduces financial

barriers to health care, but it also diminishes beneficiaries’ sensitivity to

costs and could thus increase unnecessary service utilization and total

Medicare program costs.

A substantial body of research clearly indicates that Medicare spends

more on beneficiaries with supplemental insurance relative to

beneficiaries who have Medicare coverage only. For example, an analysis

of 1993 and 1995 data found that Medicare per capita expenditures for

beneficiaries with Medigap insurance were from $1,000 to $1,400 higher

than for beneficiaries with Medicare only. Medicare per capita spending on

beneficiaries with employer-sponsored plans was $700 to $900 higher than

for beneficiaries with Medicare only.

Some evidence suggests that first-dollar, or near first-dollar, coverage may

partially be responsible for the higher spending. For example, one study

found that beneficiaries with Medigap insurance use 28 percent more

medical services (outpatient visits and inpatient hospital days) relative to

beneficiaries who did not have supplemental insurance, but were

otherwise similar in terms of age, sex, income, education, and health

status.16 Service use among beneficiaries with employer-sponsored

supplemental insurance (which often reduces, but does not eliminate, cost

sharing) was approximately 17 percent higher than the service use of

beneficiaries with Medicare coverage only.

Unlike Medigap policies, employer-sponsored supplemental insurance

policies and Medicare+Choice plans typically reduce beneficiaries’

financial liabilities but do not offer first-dollar coverage. Although there is

a wide variety in design of employer-sponsored insurance plans, many

retain cost-sharing provisions. Medicare+Choice plans also typically

require copayments for most services. Moreover, unlike the traditional feefor-service program, Medicare+Choice plans require referrals or prior

authorization for certain services to minimize unnecessary utilization.

 16“Effects of Supplemental Coverage on Use of Services by Medicare Enrollees,”

Christensen and Shinogle, Health Care Financing Review, Fall 1997.
Page 14 GAO-01-713T

As Congress continues to consider proposals to reform Medicare, it is

important to examine all facets of the program and how they relate to

other coverage that beneficiaries may have. Current Medicare cost-sharing

provisions do not reflect common insurance practices that have evolved

over time to promote prudent use and protect beneficiaries from

catastrophic care costs. Medigap policies also fail to provide the

comprehensive coverage needed by some beneficiaries. In addition, by

offering first-dollar coverage, they may undermine incentives for prudent

use of Medicare services. In light of how prevailing private sector coverage

and practice have evolved, reconsideration of coverage and cost-sharing

policies, both within the Medicare program and within any supplemental

options that may be available, would be valuable to improve both coverage

for beneficiaries and the financial health of the Medicare program.

Madam Chairwoman, this concludes my statement. I would be happy to

answer any questions that you or Members of the Subcommittee may have.

For more information, regarding this testimony, please contact me or

Laura Dummit at (202) 512-7114. Rashmi Agarwal, Susan Anthony, James

Cosgrove, Paul Cotton, John Dicken, and Carmen Rivera-Lowitt also made

key contributions to this statement.

Concluding

Observations

GAO Contacts and

Staff

Acknowledgments

(290068)