```

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

 
                    MEDICARE SUPPLEMENTAL INSURANCE
=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION
                               __________

                             MARCH 14, 2002
                               __________

                           Serial No. 107-60
                               __________

         Printed for the use of the Committee on Ways and Means

                    U.S. GOVERNMENT PRINTING OFFICE
79-301                       WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                     Allison Giles, Chief of Staff
                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Health

                NANCY L. JOHNSON, Connecticut, Chairman

JIM McCRERY, Louisiana               FORTNEY PETE STARK, California
PHILIP M. CRANE, Illinois            GERALD D. KLECZKA, Wisconsin
SAM JOHNSON, Texas                   JOHN LEWIS, Georgia
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               KAREN L. THURMAN, Florida
PHIL ENGLISH, Pennsylvania
JENNIFER DUNN, Washington

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________
                                                                   Page
Advisories announcing the hearing................................     2

                               WITNESSES

U.S. Department of Health and Human Services, Hon. Bobby Jindal, 
  Assistant Secretary for Planning and Evaluation................     8
U.S. General Accounting Office, William J. Scanlon, Director, 
  Health Care Issues.............................................    13

                                 ______

Health Insurance Association of America, Donald A. Young, M.D....    23
Medicare Rights Center, Jennifer Weiss...........................    32

                       SUBMISSION FOR THE RECORD

National Association of Health Underwriters, Arlington, VA, 
  statement and attachment.......................................    52

                    MEDICARE SUPPLEMENTAL INSURANCE

                              ----------                              

                        THURSDAY, MARCH 14, 2002

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:22 p.m., in 
room 1100 Longworth House Office Building, Hon. Nancy L. 
Johnson (Chairman of the Subcommittee) presiding.
    [The advisory and revised advisory announcing the hearing 
follow:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
March 7, 2002
No. HL-14

      Johnson Announces Hearing on Medicare Supplemental Insurance

    Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on rationalizing Medicare supplemental 
insurance policies. The hearing will take place on Thursday, March 14, 
2002, in the main Committee hearing room, 1100 Longworth House Office 
Building, beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include representatives from the Administration. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.

BACKGROUND:

      
    Because Medicare's fee-for-service program has an antiquated and 
irrational cost-sharing structure, and fails to cover many essential 
items like prescription drugs, Medicare beneficiaries buy supplemental 
coverage to help pay for health care costs not covered by Medicare. 
Almost one-quarter (24 percent) of Medicare beneficiaries purchase this 
coverage as individuals through the private insurance ``Medigap'' 
market. In 1990, Congress created 10 standardized Medigap policies. All 
10 plans are required to cover beneficiaries' coinsurance--some of the 
costs of Medicare services for which beneficiaries are responsible, 
such as 20 percent of the costs of a physician visit. Nine out of 10 of 
those policies, which comprise more than 90 percent of the Medigap 
market, are required to cover the Part A inpatient hospital deductible 
(currently $812), and the most popular Medigap policy covers both the 
Part A hospital deductible and the $100 Part B deductible for physician 
services.
      
    Numerous studies have demonstrated that covering deductibles and 
coinsurance has led to markedly higher Medicare spending because 
beneficiaries become insensitive to costs. In addition, only the three 
most expensive Medigap plans cover prescription drugs, and that 
coverage is limited. Yet, 8 of the 10 plans are required to cover 
foreign travel insurance, while most beneficiaries never leave their 
home country. Because these standard policies are set by statute, 
however, insurers have not been able to modify their offerings to 
better serve seniors as the market has evolved.
      
    In announcing the hearing, Chairman Johnson stated, ``Given our 
desire to make improvements to Medicare this year, we must examine 
Medigap and how it should fill in the gaps of a revised fee-for-service 
program that includes a drug benefit. In addition, it's been 12 years 
since we looked at how effective the Medigap benefit package is in 
providing needed coverage to seniors. I am concerned that the current 
structure of Medigap, by providing first-dollar coverage, has produced 
excessive Medicare spending. I believe we can better design both 
Medicare and Medigap so that seniors and people with disabilities get 
the most for the health care dollars they spend.''

FOCUS OF THE HEARING:

      
    Thursday's hearing will focus on improving Medigap policies in 
Medicare. The Administration will present its proposals on Medigap 
reform.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to: 
[email protected] along with a fax copy to (202) 225-2610, 
by the close of business, Thursday, March 28, 2002. Those filing 
written statements who wish to have their statements distributed to the 
press and interested public at the hearing should deliver their 200 
copies to the Subcommittee on Health in room 1136 Longworth House 
Office Building, in an open and searchable package 48 hours before the 
hearing. The U.S. Capitol Police will refuse unopened and unsearchable 
deliveries to all House Office Buildings.

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to (202) 225-2610, 
in Word Perfect or MS Word format and MUST NOT exceed a total of 10 
pages including attachments. Witnesses are advised that the Committee 
will rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov/.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call (202) 225-1721 or (202) 226-3411 TTD/TTY in advance of the event 
(four business days notice is requested). Questions with regard to 
special accommodation needs in general (including availability of 
Committee materials in alternative formats) may be directed to the 
Committee as noted above.

                                

                      ***NOTICE--CHANGE IN TIME***

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
March 13, 2002
No. HL-14-Revised

 Change in Time for Subcommittee Hearing on the Medicare Supplemental 
                               Insurance

    Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee hearing on Medicare Supplemental Insurance, scheduled for 
Thursday, March 14, 2002, at 10:00 a.m., in the main Committee hearing 
room, 1100 Longworth House Office Building, will now be held at 2:15 
p.m.

    All other details for the hearing remain the same. (See 
Subcommittee Advisory No. HL-14, dated March 7, 2002.)

                                

    Chairman Johnson. Good afternoon. I thank the panel for 
being with us and for your flexibility in adjusting to the 
rescheduling on rather late notice.
    Two weeks ago, you may be aware that we held a hearing on 
Medicare's complex, confusing, irrational, and unfair physician 
payment formula. I said at that time that it clearly epitomizes 
why we can no longer delay modernizing Medicare. Well, today we 
look at Medigap and the deductible structure of Medicare. And 
one cannot escape the conclusion that again we cannot delay 
modernizing Medicare. No other program works like Medicare, 
which tends to raise the deductible the sicker you get.
    Because Congress has not changed the law to modernize the 
program, 90 percent--9 out of 10 beneficiaries--feel compelled 
to carry supplemental insurance to fill in the holes that 
Medicare does not cover. Many receive retiree coverage through 
their former employers. The poor receive assistance through 
Medicaid. But more than one-quarter of beneficiaries purchase 
Medigap insurance themselves.
    In 1990, Congress created 10 standardized Medigap policies 
to assist beneficiaries in choosing plans. And after 12 years, 
it is surely time to revisit the inadequacies and structure of 
these plans. All 10 Medigap plans are required to cover the 
coinsurance that beneficiaries must pay under Medicare; for 
example, the 20 percent of the cost of a physician visit. Nine 
out of 10 of these plans are required to cover the part A in-
patient hospital deductible, which is currently $812.
    The most popular Medigap policy covers both the part A 
hospital deductible and the $100 part B deductible for 
physicians' services. And 8 of the 10 policies are required to 
cover foreign travel insurance--just in case these 
beneficiaries travel to France, though many never leave their 
home States. At the same time, only the three most expensive 
Medigap policies cover prescription drugs, through prescription 
drugs are seniors' most pressing need.
    Numerous studies have demonstrated that Medigap's first-
dollar coverage of medical services has encouraged 
inappropriate and often unnecessary care. Medicare spending 
rises because items and services appear free. This pushes up 
premiums for all Medicare recipients and the overall cost of 
the program to taxpayers.
    While Medigap benefits have declined, particularly those 
covering prescription drugs, premiums have continued to rise. 
From 1998 to 2000, average premiums rose 16 percent for plans 
without drug coverage, and more than twice as fast--37 
percent--for plans with drug coverage.
    In addition, premiums vary dramatically for identical plans 
in the same location. Weiss Ratings Incorporated analyzed 
Medigap premiums in 2001. A 65-year-old man living in Fort 
Myers, Florida, would pay about $3,600 for Plan ``J'' from 
Physicians Mutual Insurance Co., but only $2,700 with United 
Health Insurance through AARP. That is nearly a $1,000 less for 
the same policy in the same location. The same gentleman living 
in Las Vegas would spend about $1,500 for Plan ``C'' with 
United American Insurance Company, but about half that amount--
$778--with the USAA Life Insurance Co. for the same policy.
    Much has changed in health care and health insurance over 
the past 12 years; but Medigap insurers have been unable to 
modify their plans in response to these market changes, because 
the 10 standard Medigap policies are set by statute.
    I believe that we can better design both Medicare fee-for-
service benefits and Medigap policies, so that seniors and 
persons with disabilities get the most for the health care 
dollars they spend and have access to the quality of care they 
deserve.
    It is my great pleasure to welcome Bobby Jindal, Assistant 
Secretary for Planning and Evaluation, U.S. Department of 
Health and Human Services (HHS). I met Bobby when he was 
executive director of the bipartisan Medicare Commission. I am 
going to yield to my colleague to introduce him at a little 
greater length. Mr. McCrery.
    [The opening statement of Chairman Johnson follows:]
  Opening Statement of the Hon. Nancy L. Johnson, a Representative in 
 Congress from the State of Connecticut, and Chairman, Subcommittee on 
                                 Health
    Good morning. Two weeks ago, we held a hearing on Medicare's 
complex, confusing, and totally irrational payment formula for 
physician services. I made the statement that it clearly epitomized why 
we can wait no longer to modernize Medicare.
    After examining Medicare fee-for-service program's complex and 
irrational cost-sharing structure, I come to the same conclusion. Why 
would we charge seniors two different deductibles, and make the 
deductible for in-patient hospitalization--when a patient is least 
price sensitive--eight times higher than the outpatient deductible, 
when health care is arguably more discretionary? And why would we 
impose new cost-sharing on a patient who has been lying on her back in 
a hospital bed for two months? While most private health plans provide 
catastrophic protection for their enrollees, why does Medicare expose 
the sickest patients to unlimited cost-sharing? Similarly, while 
private plans integrated outpatient prescription drug coverage years 
ago because it simply made sense, why does Medicare lack a prescription 
drug benefit?
    The answer, of course, is that Congress has not changed the law to 
modernize the Medicare program. As a result, 90 percent--that's right, 
9 out of 10 beneficiaries--feel compelled to carry supplemental 
insurance to fill in the holes that Medicare does not cover. Many 
receive retiree coverage through their former employer. The poor 
receive assistance through Medicaid. But more than one-quarter of 
beneficiaries purchase Medigap insurance themselves.
    In 1990, Congress created 10 standardized Medigap policies to 
assist beneficiaries in choosing plans. After 12 years, it's time to 
re-visit the adequacy and structure of these plans. All 10 Medigap 
plans are required to cover the coinsurance that beneficiaries must pay 
under Medicare, for example, the 20 percent of the costs of a physician 
visit. Nine out of 10 of these plans are required to cover the Part A 
inpatient hospital deductible, which is currently $812. The most 
popular Medigap policy covers both the Part A hospital deductible and 
the $100 Part B deductible for physician services. And 8 of the 10 
policies are required to cover foreign travel insurance, just in case 
these beneficiaries travel to France, though many never leave their 
home state! At the same time, only the three most expensive Medigap 
policies cover prescription drugs, though prescription drugs are 
seniors' most pressing need.
    Numerous studies have demonstrated that Medigap's first dollar 
coverage of medical services has resulted in excessive Medicare 
spending because items and services appear free to beneficiaries. This 
higher utilization drives up costs for everyone--premiums of Medicare 
beneficiaries without Medigap coverage and costs to taxpayers. In 
addition, the prescription drug coverage mandated in Medigap is wholly 
inadequate.
    Yet Medigap premiums continue to rise. From 1998 to 2000, average 
premiums rose 16 percent for plans without drug coverage, and more than 
twice as fast, 37 percent, for plans with drug coverage. In addition, 
premiums vary dramatically for identical plans in the same location. 
Weiss Ratings, Inc. analyzed Medigap premiums in 2001. A 65-year-old 
man living in Ft. Myers, Florida would pay about $3,600 for Plan J from 
Physicians Mutual Insurance Company, but only $2,700 with United 
Healthcare Insurance Company through AARP. That's nearly $1,000 less 
for the same policy in the same location! The same gentleman living in 
Las Vegas would spend about $1,500 for Plan C with United American 
Insurance Company, but about half that amount--$778 B with the USAA 
Life Insurance Company for the same policy.
    Much has changed in health care and health insurance over the past 
12 years. But Medigap insurers have been unable to modify their 
offerings in response to these market changes because the 10 standard 
Medigap policies are set by statute. I believe that we can better 
design both Medicare fee-for-service benefits and Medigap policies so 
that seniors and persons with disabilities get the most for the health 
care dollars they spend.
    It is my pleasure to introduce Bobby Jindal, Assistant Secretary of 
Health and Human Services for Planning and Evaluation. I met Bobby when 
he was Executive Director of the Bipartisan Medicare Commission. He 
will present the Administration's proposal to add two new Medigap 
policies. The General Accounting Office will testify about the effects 
of first dollar coverage and potential reforms to Medigap coverage. 
Finally, we will hear from a representative of Medigap insurers and 
consumers about their ideas on reforming Medigap policies.

                                

    Mr. McCrery. Thank you, Madam Chair. It is my pleasure to 
introduce Bobby Jindal, who is from Louisiana and is well known 
throughout our State as being one of the special people who are 
very gifted, but who nonetheless choose to use those gifts in 
the service of the public. And he is doing so once again, as 
Assistant Secretary of Planning and Evaluation for HHS. So 
welcome, Bobby. We look forward to hearing your testimony.
    Chairman Johnson. And before the panel begins, I would like 
to yield to my colleague and friend, Mr. Stark, for as long as 
his voice can bear.
    Mr. Stark. Thank you, Madam Chair, and the distance between 
us today is just to keep you healthy.
    Chairman Johnson. Without objection.
    Mr. Stark. I hope that Mr. Jindal will be more candid in 
his remarks than the written testimony, which really does not 
describe the plan. It describes a kind of an outline of a plan. 
And the problem is that we cannot deal in outlines.
    I happen to be the author of the current Medigap insurance 
regulations, and they were always intended to be changed from 
time to time to meet current conditions. And I want to thank 
the Chair for beginning this process.
    I did find that, without an Administration plan as put out 
in their testimony, that the Congressional Budget Office (CBO), 
however, came up with a billion dollar savings over 10 years. 
And they said that they assumed there would be a $1,000 
catastrophic cap, and that the catastrophic level for drug 
coverage would be $3,500, and that such a policy would cost 
beneficiaries $470 a month, and that only about 160,000 
beneficiaries would purchase the policy.
    Now, there may be assumptions that the Administration has 
used that are different from that, and it certainly would be 
good for us to know that. Because if we are going to do this, 
if the plans will save us some money by eliminating first 
dollar, we cannot force the public to buy them. We had better 
create something that will be attractive to them. And that 
seems to be a different approach than trying to restrain 
hospitals or doctors or pharmaceutical companies.
    We have to, on the one hand, offer the public something 
that will be useful to them; and we have to deal in the dollars 
and pennies, because that is what our seniors deal in. So it 
would be helpful, before we go much further after today's 
hearing, if the Administration would care to share with us a 
plan. I do not think it is enough to just say, ``Here is an 
outline,'' and we should write it. I think it is fair, if they 
have something in mind, that they detail it. Because we are 
going to be dealing with nickels and dimes. I mean, changing 
the premium a little will make a big difference; changing the 
co-pays will make a big difference. And it will make a big 
difference to seniors.
    And it is not partisan. It is just how you want to design a 
benefit, and how much money there is going to be at the end of 
the day to pay the benefits or collect. And there is no sense--
this is not anything that the Taliban can use to harm us. None 
of this information needs to be kept secret. It has nothing to 
do with invading Iraq. It just has to do with making seniors 
like me have better health insurance at something we can 
afford.
    So I hope we can get down to the details quickly. And I 
would like to join in the process and support the Chair in 
finding some additional benefit structures. And I would hope 
that--and this will be the last words you will hear from me--
that I could get my Republican colleagues to consider the 
possibility of a Federal plan.
    We have been told--and I am not sure whether it was by CBO 
or the U.S. General Accounting Office (GAO)--that we would save 
20 percent over commercial programs if we offered it and let 
the Centers for Medicare and Medicaid Services (CMS) run it. It 
would seem to me fair, with the proliferation of plans, that we 
could offer a Federal plan as one of the options. And if it is 
anything as big as 20 percent, it might be something we should 
at least examine.
    And I thank you again for the hearing, and I look forward 
to hearing the testimony.
    Chairman Johnson. I thank you. I would like to recognize 
the Honorable Mr. Jindal.

  STATEMENT OF THE HON. BOBBY JINDAL, ASSISTANT SECRETARY FOR 
 PLANNING AND EVALUATION, U.S. DEPARTMENT OF HEALTH AND HUMAN 
                            SERVICES

    Mr. Jindal. Thank you, Chairman Johnson, Representative 
Stark, Representative McCrery, Representative Crane, 
distinguished Subcommittee Members.
    I do look forward to talking to you about the details that 
are in the fact sheet as well as in the testimony. But I also 
want to first thank you for inviting me to discuss the 
important issue of Medicare supplemental insurance, commonly 
referred to as ``Medigap,'' and to share with you the 
Administration's views about, and proposals to strengthen, this 
critical complement to the Medicare fee-for-service program. We 
do have details. We do have specific proposals. And I look 
forward to talking about those, both in response to your 
questions, and also as part of my testimony.
    Clearly, as the Chairman and others have indicated, because 
of the major gaps in the benefit package in the current fee-
for-service program, Medigap is an essential part of the 
Medicare benefits coverage for millions of our Nation's elderly 
and disabled. The Administration, however, also shares your 
concern regarding the rapid increases in Medigap premiums in 
recent years. Most seniors now pay more for Medigap than they 
pay in Medicare premiums. We also agree that, working together, 
we can better design both Medicare and Medigap so that seniors 
and people with disabilities can get more affordable coverage 
and get the most of their health care dollars that they spend.
    As you know, the President has put forward a detailed 
framework for strengthening Medicare that would address the 
many threats to its ability to give seniors the health security 
they need. Medicare's lack of prescription drug coverage is 
only one example of the ways in which the programs lag behind.
    The Administration also believes that Medicare should 
provide better coverage for preventive care and serious 
illness. Medicare's statutory benefits have enormous gaps, and 
its cost-sharing requirements can add up quickly. For example, 
beneficiaries who require $25,000 or more in care are typically 
responsible for about $5,000 in deductibles and copayments. Yet 
Medicare provides no stop-loss protection, and this is 
something the Administration believes should change.
    As part of legislation to improve Medicare's existing 
coverage, it is also important to develop new Medigap options 
that better meet beneficiary needs and provide more affordable 
premiums. Clearly, the existing set of options, which require 
beneficiaries to purchase first-dollar coverage for 
hospitalizations and even basic services like doctor's visits 
before they can obtain any drug coverage at all, has become 
outdated.
    Yet giving seniors the option of a better benefit package, 
including prescription drugs, and more affordable Medigap plans 
to go along with it, will take years to implement. So we have 
also proposed that two new Medigap plans be added to improve 
beneficiaries' options quickly. These options would include 
valuable prescription drug coverage, protection against high 
out-of-pocket costs, and coverage of most of Medicare's cost 
sharing--all at a significantly lower price than the current 
Medigap options that already include prescription drugs.
    While we are obviously willing to work with this Committee, 
with Congress, and with other interested parties, on the 
details of these initiatives, we believe that providing better 
short-term options for seniors to get more affordable drug 
coverage is a critical priority. In addition, these options 
would also generate modest savings for Medicare, as well as 
savings for beneficiaries.
    Before I provide these additional details about our 
proposals, I would like to briefly review the key features and 
the problems with Medigap coverage today. As the Chair has 
already noted, one of the main reasons why seniors--nearly all 
seniors; over 90 percent of them--have some form of 
supplemental coverage is the fact that Medicare does not 
provide adequate protection against the cost of serious 
illness. As you know, the deductible for each hospital spell 
now exceeds $800, and will grow rapidly. And in addition to the 
hospital deductible and co-payment, eventually Medicare 
coverage can eventually run out altogether. This stands in 
stark contrast to private plans like the Blue Cross/Blue Shield 
option that is offered to all Federal employees, which has a 
single annual deductible and modest coinsurance for out-patient 
care, and provides much better coverage for hospitalizations.
    And of course, not all beneficiaries get their supplemental 
insurance through Medigap. Those who are eligible often receive 
this coverage through Medicaid or their former employer. Others 
are able to lower their cost-sharing through joining a 
Medicare+Choice plan. It is important to recognize that, 
despite the changes in Medicare+Choice benefits, these plans 
still often provide a better deal for seniors than fee-for-
service Medicare plus an increasingly costly Medigap policy.
    Seniors face important problems in getting the coverage 
they need. And the written testimony certainly has more details 
about the antiquated benefit design and about the facts of 
first-dollar coverage. You have heard estimates not only from 
the actuary, but from GAO, from CBO, and others, that this 
increases utilization by at least 23 percent. I think it is 
particularly interesting to note that when you compare it to 
the cost-sharing coverage enjoyed by those with employer 
coverage, even there you have got a significant increase in 
utilization and spending by those with first-dollar coverage. 
According to the GAO and others, even modest changes in first-
dollar coverage would lead to significantly lower Medicare 
costs, and in turn lower Medigap premiums.
    And then finally, fourth, the issue of rising premiums: And 
again, I think you will hear more later--and it is in the 
written testimony--about the rapid increase both in Medigap 
plans that offer prescription drugs, but also for Medigap plans 
that do not offer prescription drugs.
    Clearly, addressing these problems requires a comprehensive 
approach. That is why the President has outlined a 
comprehensive approach to strengthening Medicare which includes 
changes in cost sharing. Again, I refer you to the testimony 
for more details about the President's plan. I know that you 
have heard about that before.
    Let me just close by briefly mentioning that what the 
President has proposed will immediately add two new Medigap 
options. And again, the details are in your fact sheet. They 
are also covered in the testimony. One plan would cover 75 
percent of current cost-sharing, without a drug benefit, 
similar to the ones that are offered today in Medigap. The 
second plan would offer coverage for additional drug expenses, 
like that in Plan ``J,'' but would also have a higher stop-loss 
limit, and would cover 50 percent of Medicare's cost-sharing.
    Both of these options would be much more affordable than 
current Medigap policies. Our actuaries said their premiums 
would be at least $500 lower. They would also reduce cost-
sharing for beneficiaries, and provide much better protection 
against high cost.
    Let me close by noting that up to one and a half million 
beneficiaries would choose these policies, almost half of whom 
would not have had drug coverage right now. So in addition to 
lowering costs for the program and providing better coverage 
and better options for seniors, we can also provide drug 
coverage to 700,000 seniors who do not have this coverage 
today. And this estimate may be a conservative one, based on 
surveys done by other groups.
    Let me close by saying we are open to working with this 
Committee, other Members, and key stakeholders, going forward 
on the details. What is important to note is the current 
structure, with its emphasis on first-dollar coverage, does 
make prescription drug coverage much less affordable and much 
less accessible to seniors. We look forward to working with you 
to increase the accessibility and affordability of drug 
coverage, first, in the short term, through Medigap reforms, 
but in the long term, through the President's framework for 
improving the overall Medicare program. Thank you, Mr. 
Chairman, for letting me come and address the Committee.
    [The prepared statement of Mr. Jindal follows:]
 Statement of the Hon. Bobby Jindal, Assistant Secretary for Planning 
      and Evaluation, U.S. Department of Health and Human Services
    Chairman Johnson, Representative Stark, distinguished Subcommittee 
members, thank you for inviting me to discuss the issue of Medicare 
supplemental insurance, commonly referred to as Medigap, and to share 
with you the Administration's views about--and proposals to 
strengthen--this critical complement to the Medicare fee-for-service 
program. Clearly, because of the major gaps in the benefit package in 
the fee-for-service program, Medigap is an essential part of Medicare 
coverage for millions of our nation's elderly and disabled. The 
Administration shares your concern regarding the rapid increases in 
Medigap premiums in recent years: most seniors now pay much more for 
Medigap than they pay in Medicare premiums. We also agree that we can 
better design both Medicare and Medigap so that seniors and people with 
disabilities can get more affordable coverage, and get the most for the 
health care dollars they spend.
    As you know, the President has put forward a framework for 
strengthening Medicare that would address the many threats to its 
ability to give seniors the health security they need. Medicare's lack 
of prescription drug coverage is only one example of the ways in which 
the program has lagged behind. The Administration also believes that 
Medicare should provide better coverage for preventive care and serious 
illness. Medicare's statutory benefits have enormous gaps, and its 
cost-sharing requirements can add up quickly. Beneficiaries who require 
$25,000 or more in care are typically responsible for about $5,000 in 
deductibles and co-payments. Yet Medicare provides no stop-loss 
protection--something the Administration believes should change.
    As past of legislation to improve Medicare's existing coverage, it 
is also important to develop new Medigap options that better meet 
beneficiary needs and provide more affordable premiums. Clearly the 
existing set of options, which require beneficiaries to purchase 
``first-dollar'' coverage for hospitalizations and even basic services 
like doctor's visits before they can obtain any drug coverage, has 
become outdated. Yet giving seniors the option of a better benefit 
package, including prescription drugs, and more affordable Medigap 
plans to go along with it will take several years to implement. So we 
have also proposed that two new Medigap plans be added to improve 
beneficiaries' options quickly. These options would include valuable 
prescription drug coverage, protection against high out-of-pocket 
costs, and coverage of most of Medicare's cost-sharing--all at a 
significantly lower price than the current Medigap options that include 
prescription drugs. While we are obviously willing to work with 
Congress and other interested parties on the details of these 
initiatives, we believe that providing better short-term options for 
seniors to get more affordable drug coverage is a critical priority. In 
addition, these options would generate modest savings for Medicare as 
well as savings for beneficiaries.

BACKGROUND

    Before I provide additional details about our proposals, I would 
like to briefly review the key features of--and problems with--Medigap 
coverage today. One of the main reasons why nearly all seniors in the 
fee-for-service (government) plan have supplemental insurance is that 
Medicare does not provide adequate protection against the costs of 
serious illness. As you know, the deductible for each hospital spell 
now exceeds $800 and will grow rapidly. Moreover, Medicare 
beneficiaries who require long hospital stays are exposed to daily co-
payments that run into the hundreds of dollars--and Medicare coverage 
can eventually run out altogether. This stands in stark contrast to 
private plans like the Blue Cross/Blue Shield plan offered to Federal 
employees, which has a single annual deductible and modest coinsurance 
for outpatient care but provides much better coverage for 
hospitalizations. Not surprisingly, the Coalition to Preserve Choice 
for Seniors (which consists of several Medigap insurers) recently found 
that coverage of hospital expenses not paid by Medicare is the Medigap 
benefit that seniors value most.
    Of course, not all beneficiaries get their supplemental insurance 
through Medigap. Those who are eligible often obtain this coverage 
through Medicaid or their former employer. Many have been able to lower 
their co-payments and deductibles by joining a Medicare+Choice plan. It 
is important to recognize that, despite the changes in Medicare+Choice 
benefits that have resulted from years of consistently inadequate 
payment updates, these plans still provide a better deal for seniors 
than fee-for-service Medicare plus an increasingly costly Medigap 
policy. That is why the Administration places a high priority on 
ensuring that these private plan options remain available for 
beneficiaries.
    But the focus of our discussion today is on the roughly 10 million 
beneficiaries who have to purchase their own Medigap policy. The 
designs of these policies were standardized in 1990 and have scarcely 
been updated since. As a result, these seniors face important problems 
in getting the coverage they need:
           Antiquated benefit design. The 1990 reforms created 
        10 standard Medigap plans, but three specific designs account 
        for about three-fourths of the enrollment in these standardized 
        plans. This concentration of enrollment suggests that the other 
        available plans are not providing the range of options that 
        beneficiaries need. What is more, Medigap drug coverage can be 
        purchased only in combination with first-dollar coverage for 
        other services. As a result, the added premiums for these 
        policies can be so high that they greatly limit the value of 
        the benefit--if these policies are available at all. Not 
        surprisingly, less than 10 percent of those who purchase a 
        standardized plan buy one that covers drugs. In effect, it is 
        easier for seniors to get coverage for a foreign travel 
        emergency than it is to get drug coverage from Medigap.
           First-dollar coverage. All of the standard Medigap 
        plans pay the up-front costs of care for beneficiaries, often 
        including the first dollar spent. Research has demonstrated 
        that first-dollar coverage results in increased utilization and 
        higher costs without providing clear health benefits. The 
        independent Office of the Actuary at CMS estimates that service 
        use is 23 percent higher for beneficiaries with Medigap than 
        for those without supplemental insurance.* Medicare 
        pays most of these costs, but first-dollar coverage also leads 
        to higher Medicare and Medigap premiums. Indeed, the added cost 
        of a Medigap policy that covers the $100 Part B deductible 
        often exceeds $100--so seniors who purchase these policies are 
        merely ``dollar trading.'' According to GAO and others, even 
        modest changes in first-dollar coverage would lead to 
        significantly lower Medicare costs, and in turn, Medigap costs. 
        Additionally, almost all private insurance plans avoid first-
        dollar coverage and instead use reasonable co-payments. Private 
        plan enrollees have some limited out-of-pocket costs to help 
        encourage appropriate use of services, and they benefit from 
        much lower insurance premiums. As a result, Medicare spending 
        for those with supplemental coverage through their employer is 
        about 10% less than for those with individual Medigap policies.
---------------------------------------------------------------------------
    \*\ Other independent analysts have reached similar conclusions; 
see Hogan (Testimony before the Subcommittee on Health of the House 
Committee on Ways and Means, May 9, 2001) and Physician Payment Review 
Commission (1997).
---------------------------------------------------------------------------
           Rising premiums. The result of these problems can be 
        seen in high and rising premiums. In 1998, the average senior 
        was actually spending more on supplemental insurance premiums 
        than on prescription drugs. According to Weiss Ratings, the 
        cost of Medigap policies that provide drug coverage has grown 
        rapidly since then--by 17 to 34 percent in 2000 alone. Premiums 
        for Medigap policies that do not cover drugs did not rise quite 
        as fast in 2000 but over the past three years have increased 25 
        to 45 percent.

IMPROVING MEDICARE AND MEDIGAP FOR THE FUTURE

    Clearly, addressing these problems requires a comprehensive 
approach. That is why the President worked with Members of Congress 
from both parties to develop a framework for strengthening and 
improving Medicare. It includes giving all seniors the option of 
subsidized prescription drug coverage. It includes giving seniors 
better options to reduce their costs in a private plan. And it includes 
giving seniors the option of keeping the coverage they have now or 
choosing an improved benefit package with better coverage for 
preventive care and serious illness as part of a modernized fee-for-
service plan. In specific:
           Medicare's preventive benefits should have zero co-
        payments and should be excluded from the deductible.
           Medicare's traditional plan should have a single 
        indexed deductible for Parts A and B to provide better 
        protection from high expenses for all types of health care.
           Medicare should provide better coverage for serious 
        illnesses, through lower co-payments for hospitalizations, 
        better coverage for very long acute hospital stays, simplified 
        cost sharing for skilled nursing facility stays, and true stop-
        loss protection against very high expenses for Medicare-covered 
        services.
           These changes should not reduce the overall value of 
        Medicare's existing benefits.
    These improvements in Medicare's coverage will reduce the benefit 
gaps that Medigap must fill and will lower Medigap premiums. But the 
President's framework also includes updated and more affordable Medigap 
options for beneficiaries who choose the improved Medicare benefit 
package. These new options should begin by giving beneficiaries even 
better protection against high-costs--supplementing the stop-loss limit 
that would be added to Medicare. More generous policies could then 
reduce Medicare's deductibles and co-payments--but they should not be 
structured in such a way that seniors have to buy first dollar coverage 
for hospitalizations and doctor's visits before they can obtain drug 
coverage or supplement the Medicare drug benefit.
    At the same time, the President strongly believes that 
beneficiaries who wish to keep their current benefits with no changes 
must be able to do so. Let me be clear: under the President's 
framework, seniors who are happy with their current Medigap policy 
would never have to change it.
    Such restructuring will also take time. However, to provide more 
affordable Medigap options before the improved benefit package becomes 
available, and to improve the Medigap options available for seniors who 
prefer their current Medicare benefits, the Administration proposes the 
addition of two new Medigap plans to the existing ten standardized 
plans. We believe both of these new plans should cover all of the 
coinsurance for extended hospital says in the same way that the current 
Medigap plans do, but should not cover the Part B deductible. To give 
seniors a choice about how best to meet their needs:
           One plan would cover 75 percent of current cost-
        sharing and have a lower stop-loss limit while providing modest 
        drug coverage that most beneficiaries would value. The drug 
        benefit would have a $250 deductible and cover half of the next 
        $2,500 in drug spending (as in the current Medigap plans H and 
        I).
           The other would provide coverage for additional drug 
        expenses--like the current plan J--but have a higher stop-loss 
        limit and cover 50 percent of Medicare's cost-sharing.
    Both of these options would be considerably more affordable that 
the current Medigap policies that cover drugs. They would substantially 
reduce cost-sharing for beneficiaries and provide much better 
protection against high costs. They would also provide needed options 
for beneficiaries who want lower premiums but have not chosen to enroll 
in one of the two high-deductible Medigap policies--giving 
beneficiaries a choice between ``all or nothing.'' And they would 
increase the number of seniors with drug coverage. If we provide a one-
time opt-in for current beneficiaries, we estimate that up to 1.5 
million beneficiaries would choose these new policies once they are 
available--and that nearly half of these enrollees would be 
beneficiaries who do not have drug coverage now. This could even be a 
conservative estimate; the Coalition to Preserve Choice for Seniors 
found that one-third of Medigap policy holders would favor a proposal 
that included a modest deductible and some payments for doctor visits 
and hospital stays--even without the offer of drug coverage. Moreover, 
we can achieve this significant increase in drug coverage among seniors 
right away, not several years down the road, while saving money for 
beneficiaries and the Medicare program.
    Let me reiterate that we are quite open to working with this 
Committee, other Members, and key stakeholders going forward. For 
example, it could be that a nominal co-pay for doctor's visits would 
work better than a fixed percentage or that the drug benefit designed 
could be improved. But, as with our other Medicare proposals, we want 
to act now. The idea of making updated Medigap plans available has long 
had bipartisan support. For example, President Clinton proposed to 
update Medigap with a new supplemental coverage option that included 
reasonable limits on cost sharing. The new plans we are proposing would 
also generate modest budgetary savings--at least $1.3 billion over 10 
years--since they would not provide first-dollar coverage. But the 
primary reason we support them is that they provide another means for 
seniors to obtain more affordable drug coverage quickly. I look forward 
to answering your questions.

                                

    Chairman Johnson. Thank you very much. Mr. Scanlon, a 
pleasure to have you before the Subcommittee again.

STATEMENT OF WILLIAM J. SCANLON, DIRECTOR, HEALTH CARE ISSUES, 
                 U.S. GENERAL ACCOUNTING OFFICE

    Mr. Scanlon. Thank you very much, Madam Chairwoman and 
Members of the Subcommittee. I am very pleased to be here today 
as the Subcommittee considers the issue of Medicare 
supplemental benefits. And I think there is a great deal of 
agreement between the facts that we have examined about these 
policies and what you have heard from Mr. Jindal and what was 
mentioned in your opening statements.
    There is no issue that Medicare beneficiaries are in need 
of supplementary coverage, given the structure of the program. 
We have heard a lot over the past several years about the lack 
of prescription drug coverage. And that is certainly 
understandable, given the importance that pharmaceuticals have, 
the role that they play in terms of being effective treatments 
for a variety of conditions, and because of the rapid rise in 
drug costs.
    I think it is also important that this Subcommittee last 
year brought a great deal of attention to the fact that 
Medicare is not a genuine insurance program; that you are not 
protected against catastrophe; there is no stop-loss coverage; 
that Medicare cost sharing can leave you vulnerable for 
considerable expenditures. In fact, close to three and a half 
million beneficiaries in 1997 were liable for more than $2,000, 
and approximately 750,000 of them were liable for more than 
$5,000 that year.
    Given that, it is not surprising that people turn to 
supplementary coverage. And given that not all beneficiaries 
are eligible for either employer-based coverage, 
Medicare+Choice, or Medicaid, Medigap is a very popular option. 
As you indicated, about 25 percent of beneficiaries have such 
policies.
    But the policies we have today are problematic by 
themselves. They are, as you have heard and have indicated, 
expensive. The expense, while high at the national level, 
varies greatly by geography; so that people in certain areas 
spend much, much more than the national level for a policy, and 
spend even more depending upon the insurer that they choose.
    Policies are expensive in part because they are marketed 
individually, as opposed to being sold to groups. And one of 
the results of that is that about 20 percent of policy premiums 
go to administrative costs. The policies are expensive also 
because of the design of those policies, which is dictated by 
Omnibus Budget Reconciliation Act 1990 (OBRA '90).
    In creating the 10 standardized packages, we have 
essentially eliminated most of Medicare cost sharing, as you 
have indicated. And given that so many elderly use at least 
some medical care during the course of the year, policies 
essentially function like a pre-payment arrangement, rather 
than as insurance. With insurance, you would expect that only a 
fraction of policy holders are likely to incur a loss and 
therefore receive a benefit, and premiums can be 
correspondingly lower. However, when everybody is virtually 
going to receive a benefit, then premiums have to be much 
higher.
    Medigap premiums are also higher because of that structure, 
in terms of eliminating the cost sharing, because it leads 
beneficiaries to use more services. One study that we quoted in 
our testimony indicates that Medigap policy holders use 28 
percent more services than beneficiaries without supplemental 
coverage. Obviously, this does not only add to the cost of a 
Medigap policy; it adds to the cost of the Medicare program.
    The other major drawback with Medigap policies is the 
inadequate prescription drug coverage. With available coverage, 
beneficiaries must pay over half their drug expenses, and have 
significant limits that do not provide catastrophic protection 
for extreme drug costs.
    There are likely benefits from creating these standardized 
packages, or standardized plans, in the OBRA '90, given the 
abuses that were reported in the Medigap market before then. 
However, it does seem that it is now time to think about 
revisiting the design of these packages, and that new options 
would benefit both policy holders and the program.
    The Administration's proposal seems to point in the right 
direction. Having new options involving catastrophic 
protection, having drug coverage, and reducing the amount of 
first-dollar coverage, we think are positive. Having not had 
the details before today, we could not look at them in detail, 
and would need to do so in order to comment on the merits of 
these proposals versus others. But I think it is important that 
we start to move toward making Medigap policies more like 
employer-based insurance. That is, to have some first-dollar 
cost sharing that encourages the prudent use of services; to 
structure cost sharing in a way that discretionary services 
have cost sharing, and less discretionary services may not; for 
instance, not to have cost sharing for hospitalizations which 
are rarely discretionary. This type of policy is likely to 
moderate costs and to change use somewhat, but not too 
severely.
    Studies have also shown that Medicare beneficiaries with 
employer-based insurance use 17 percent more services than 
beneficiaries without supplementary insurance. That compares to 
the 28 percent that I noted earlier.
    We would be happy to work with this Subcommittee as you 
consider these options. And that completes my statement. I will 
be happy to answer any questions that you have.
    [The prepared statement of Mr. Scanlon follows:]
  Statement of William J. Scanlon, Director, Health Care Issues, U.S. 
                       General Accounting Office
    Madam Chairwoman and Members of the Subcommittee:
    I am pleased to be here today as you consider the role of 
``Medigap'' policies in supplementing the Medicare benefit. Medicare 
provides valuable and extensive coverage for the health care needs of 
40 million elderly and disabled beneficiaries. 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 policies are an important source 
of this supplemental coverage because they are widely available to 
beneficiaries. The other sources--employer-sponsored policies, 
Medicare+Choice plans, and Medicaid programs--are not available to all 
beneficiaries. However, concerns exist that Medigap policies can be 
expensive and may undermine the legitimate role of cost-sharing in a 
health insurance plan--that is, to encourage the cost-effective use of 
services. Moreover, due to statutory restrictions, these policies 
provide only limited prescription drug coverage, leaving an important 
gap in beneficiary protection against high health care expenses.
    In this context, the president has proposed adding 2 new types of 
Medigap plans to the existing 10 standard plan types.1 The 
new plans would provide protection against catastrophic expenses for 
Medicare-covered services and would include different levels of 
prescription drug coverage. To help keep premiums affordable, the new 
plans would also require beneficiary cost-sharing. At this point, 
detailed specifications for these plans are not available.
---------------------------------------------------------------------------
    \1\ Budget of the United States Government, Fiscal Year 2003 
(Washington, D.C.: Government Printing Office, Feb. 4, 2002).
---------------------------------------------------------------------------
    To assist the subcommittee as it considers ways to improve 
protections for beneficiaries, my remarks today focus on the design of 
Medicare's benefit package and the role that Medigap plays in providing 
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--its 
coverage of Medicare's required deductibles and coinsurance--undermines 
the cost control incentives of Medicare's cost-sharing requirements. My 
comments are based on our prior and ongoing work on Medicare and 
Medigap as well as other published research.2
---------------------------------------------------------------------------
    \2\ U.S. General Accounting Office, Medigap Insurance: Plans Are 
Widely Available but Have Limited Benefits and May Have High Costs, 
GAO-01-941 (Washington, D.C.: July 31, 2001).
---------------------------------------------------------------------------
    In summary, Medicare's benefit 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. Recent estimates suggest that about 45 
percent of Medicare beneficiaries' health care costs are not covered.
    Medigap policies help to fill in some of Medicare's gaps but also 
have shortcomings. They are often expensive. In 1999, premiums paid for 
Medigap policies averaged $1,300, with more than 20 percent going to 
administrative costs. Medigap plans typically cover Medicare's required 
deductibles, coinsurance, and copayments but do not fully protect 
beneficiaries from potentially significant out-of-pocket costs. Medigap 
policies offering prescription drug coverage can be inadequate because 
beneficiaries still pay most of the cost and the Medigap benefit is 
capped. In addition, Medigap's 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.
Background
    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 deductible, 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 $54 per month.3 Beneficiaries are also responsible 
for part B deductibles and coinsurance.
---------------------------------------------------------------------------
    \3\ The premium amount is adjusted each year so that expected 
premium revenues equal 25 percent of expected part B spending.

      TABLE 1: MEDICARE COVERAGE AND BENEFICIARY COST-SHARING, 2002
------------------------------------------------------------------------
            Part A Coverage                 Copayments and deductibles
------------------------------------------------------------------------
Inpatient hospital                       For each benefit period:
                                         $812 deductible for up to 60
                                          days a
                                         $203/day for days 61 through 90
                                         $406/day for days 91 through
                                          150 b
                                         All costs beyond 150 days
------------------------------------------------------------------------
Skilled nursing facility                 For each benefit period:
                                         Nothing for up to 20 days
                                         $101.50/day or less for days 21
                                          through 100
                                         All costs beyond 100 days
------------------------------------------------------------------------
Home health                              Nothing
                                         20 percent of approved amount
                                          for durable medical equipment
------------------------------------------------------------------------
Hospice                                  $5 or less for outpatient drugs
                                         5 percent of approved amount
                                          for inpatient respite care
------------------------------------------------------------------------
Blood                                    Cost of first 3 pints
------------------------------------------------------------------------
        Part B Coverage c                          Copayments and
                                          deductibles
------------------------------------------------------------------------
Physician and Medical                    $100 deductible each year
                                         20 percent of approved amount
                                         50 percent of approved amount
                                          for mental health
------------------------------------------------------------------------
Clinical laboratory                      Nothing
------------------------------------------------------------------------
Home health                              Nothing
                                         20 percent of approved amount
                                          for durable medical equipment
------------------------------------------------------------------------
Outpatient hospital                      Coinsurance or copayment varies
                                          according to service (after
                                          part B deductible)
------------------------------------------------------------------------
Blood                                    Cost of first 3 pints
                                         20 percent of approved amount
                                          (after part B deductible) 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 through 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.
c 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: Centers for Medicare and Medicaid Services, Medicare & You 2002,
  CMS-10050 (Baltimore: Sept. 2001).

                              ----------                              

    Most Medicare beneficiaries have some type of supplemental coverage 
to help pay for Medicare cost-sharing requirements as well as for some 
services 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 40 million beneficiaries have 
employer-sponsored supplemental coverage. These plans, which typically 
include cost-sharing requirements, pay for some costs not covered by 
Medicare, such as shares of coinsurance and deductibles and the cost of 
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 not offer 
these health benefits to Medicare-eligible retirees.4 Small 
employers are even less likely to offer retiree health benefits.
---------------------------------------------------------------------------
    \4\ William M. Mercer, Incorporated, Mercer/Foster Higgins National 
Survey of Employer-sponsored Health Plans 2000 (New York, N.Y.: 2001).
---------------------------------------------------------------------------
    Approximately 14 percent of Medicare beneficiaries are enrolled in 
Medicare+Choice plans, which include health maintenance organizations 
(HMO) and other private insurers who are paid a set amount each month 
to provide nearly all Medicare-covered services. Compared to Medicare's 
traditional fee-for-service program, HMOs typically offer lower cost-
sharing requirements and additional benefits, including prescription 
drugs, in exchange for a restricted choice of providers. However, 
Medicare+Choice HMOs are not available in all parts of the country. In 
2002, about 40 percent of all beneficiaries live in counties where 
there are no Medicare+Choice HMOs.
    In 1997, about 17 percent of Medicare beneficiaries received 
assistance from Medicaid, the federal-state health financing program 
for low-income aged and disabled individuals. Depending upon state-
defined eligibility policies, some of these low-income individuals are 
entitled to full Medicaid benefits (so called ``dual eligibles''), 
which include coverage for certain services not available through 
Medicare, such as most outpatient prescription drugs. Under federal 
law, all Medicare beneficiaries with incomes below the federal poverty 
level are entitled to have their Medicare premiums and cost-sharing 
paid for by Medicaid. Similarly, Medicare beneficiaries with incomes 
slightly above the poverty level are eligible to have all or part of 
their Medicare premiums paid for by Medicaid.5
---------------------------------------------------------------------------
    \5\ Many low-income Medicare beneficiaries who are eligible for 
Medicaid and other federal-state programs that 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 U.S. General Accounting Office, Low-
Income Medicare Beneficiaries: Further Outreach and Administrative 
Simplification Could Increase Enrollment, GAO/HEHS-99-61 (Washington, 
D.C.: Apr. 9, 1999).
---------------------------------------------------------------------------
    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 
than 10 million individuals--about one-fourth of all beneficiaries--
were covered by Medigap policies.6 The Omnibus Budget 
Reconciliation Act of 1990 (OBRA) required that Medigap policies be 
standardized and allowed a maximum of 10 different benefit packages 
offering varying levels of supplemental coverage.7 Policies 
sold in most states since July 31, 1992, are modeled on 1 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. The Balanced Budget Act of 1997 
permitted insurers to offer high-deductible versions of the existing F 
and J plans.8
---------------------------------------------------------------------------
    \6\ The National Association of Insurance Commissioners reports 
that Medigap enrollment has declined from about 14 million in 1994.
    \7\ Pub. L. 101-508, Sec. 4351, 104 Stat. 1388-30, 1388-127 (1990).
    \8\ Pub. L. No. 105-33, Sec. 4032, 111 Stat. 251, 359 (1997).

                           TABLE 2: BENEFITS COVERED BY STANDARDIZED MEDIGAP POLICIES
----------------------------------------------------------------------------------------------------------------
                                                                           Plan                            Plan
            Benefits              Plan A  Plan B  Plan C  Plan D  Plan E    Fa    Plan G  Plan H  Plan I    Ja
----------------------------------------------------------------------------------------------------------------
Coverage for:                         X       X       X       X       X       X       X       X       X       X
 Part A coinsurance
 365 additional hospital
 days during lifetime
 Part B coinsurance
 Blood
----------------------------------------------------------------------------------------------------------------
Skilled nursing facility                              X       X       X       X       X       X       X       X
 coinsurance
----------------------------------------------------------------------------------------------------------------
Part A deductible                             X       X       X       X       X       X       X       X       X
----------------------------------------------------------------------------------------------------------------
Part B deductible                                     X                       X                               X
----------------------------------------------------------------------------------------------------------------
Part B balance billing b                                                      X       X               X       X
----------------------------------------------------------------------------------------------------------------
Foreign travel emergency                              X       X       X       X       X       X       X       X
----------------------------------------------------------------------------------------------------------------
Home health care                                              X                       X               X       X
----------------------------------------------------------------------------------------------------------------
Outpatient prescription drugs                                                               X c     X c     X d
----------------------------------------------------------------------------------------------------------------
Preventive medical care                                               X                                       X
----------------------------------------------------------------------------------------------------------------
Note: This chart does not apply in Massachusetts, Minnesota, and Wisconsin, where alternative standards for
  supplemental health policies exist.
a Plans F and J also have a high-deductible option ($1,620 in 2002) 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 $250 annual deductibles.
d Plan J pays 50 percent of drug charges up to $3,000 per year and has a $250 annual deductible.
Source: Health care Financing Administration, 2001 Guide to Health Insurance for People with Medicare, HCFA-
  02110 (Baltimore: 2001).

                              ----------                              

    Currently, Medicare beneficiaries aged 65 and older are guaranteed 
access to Medigap policies within 6 months of enrolling in part B, 
regardless of their health status.9 Subsequent laws have 
added guarantees for certain other beneficiaries. Beneficiaries who 
enroll in a Medicare+Choice plan when first becoming eligible for 
Medicare at age 65 and then leave the plan within 1 year are also 
guaranteed access to any Medigap policy. Those who terminate their 
Medigap policies to join a Medicare+Choice plan can return to their 
previous policies or, if the original policies are not available, be 
guaranteed access to plans A, B, C, and F, none of which covers 
prescription drugs. 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 four standardized 
Medigap policies.10 Beneficiaries who do not meet any of 
these conditions may be denied coverage or be charged higher premiums.
---------------------------------------------------------------------------
    \9\ 42 USC Sec. 1395ss(s)(2)(A).
    \10\ These protections, which applied to beneficiaries aged 65 and 
older, were added by the Balanced Budget Act, Pub. L. 105-33, 
Sec. 403,111 Stat. 251, 330. In addition to these federal protections, 
21 states provided for additional Medigap protections in 2000.
---------------------------------------------------------------------------
Medicare's Cost-Sharing Requirements and Gaps in Prescription Drug 
        Coverage Put Beneficiaries at Considerable Financial Risk
    In Medicare, the lack of dollar limits on beneficiaries' cost-
sharing obligations--deductibles, coinsurance, and copayments--puts 
beneficiaries with extensive health care needs at risk for very large 
expenses for Medicare-covered services. Similarly, Medicare's lack of 
coverage for certain services, especially most outpatient prescription 
drugs, can expose beneficiaries to substantial financial risk. The 
increasingly important role of pharmaceuticals in medical care and the 
continuing rapid increases in drug prices accentuate this risk.
    Unlike most employer-sponsored plans for active workers, Medicare 
does not limit beneficiaries' cost-sharing liabilities, which can 
represent a significant share of their personal resources. In 2000, 
premiums, deductibles, coinsurance, and copayments that beneficiaries 
were required to pay for services that Medicare covers equaled an 
estimated 23 percent of total Medicare expenditures. For Medicare-
covered services alone, beneficiaries who obtained services in 1998 had 
an average liability of $1,458, consisting of $932 in Medicare cost-
sharing in addition to the $526 in annual part B premiums for that 
year.
    However, the burden of Medicare cost-sharing can be much higher for 
beneficiaries with extensive health care needs. In 1998, the most 
current year of available data on the distribution of these costs, 
about 3.4 million beneficiaries (11.5 percent of beneficiaries who 
obtained services) were liable for at least $2,000 for Medicare cost-
sharing and part B premiums. Approximately 736,000 of these 
beneficiaries (2.5 percent) were liable for at least $5,000, and about 
167,000 beneficiaries (0.6 percent) were liable for at least $10,000. 
In contrast, private employer-sponsored health plans for active workers 
in 2000 typically limited maximum annual out-of-pocket costs for 
covered services to less than $2,000 per year for single 
coverage.11
---------------------------------------------------------------------------
    \11\ The Kaiser Family Foundation and Health Research and 
Educational Trust, Employer Health Benefits: 2000 Annual Survey (Menlo 
Park, Calif. and Chicago: 2000).
---------------------------------------------------------------------------
    Furthermore, Medicare provides no coverage for certain health care 
services, such as most outpatient prescription drugs. These limitations 
put beneficiaries at additional risk of incurring potentially 
catastrophic expenses. 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. In 
2000, the average beneficiary is estimated to have incurred about 
$3,100 in total out-of-pocket expenses for health care--an amount equal 
to about 22 percent of beneficiary income.12
---------------------------------------------------------------------------
    \12\ Stephanie Maxwell, Marilyn Moon, and Mesha Segal, Growth in 
Medicare and Out-Of-Pocket Spending: Impact on Vulnerable Beneficiaries 
(Washington, D.C.: Urban Institute, 2000).
---------------------------------------------------------------------------
    The combination of Medicare cost-sharing and costs of uncovered 
services represents a much greater financial burden for some 
beneficiaries. For example, in 2000, 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. 
Low-income single women over age 85 who are 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.13 
These percentages are expected to increase over time as Medicare 
premiums and costs for prescription drugs and other health care goods 
and services rise faster than incomes.
---------------------------------------------------------------------------
    \13\ Maxwell, Moon, and Segal.
---------------------------------------------------------------------------
Current Medigap Policies Address Some Medicare Shortcomings But Are 
        Expensive
    The shortcomings in Medicare's benefit package underscore the 
importance of supplemental health insurance for program beneficiaries. 
More than one-fourth of beneficiaries have Medigap policies to fill 
Medicare coverage gaps, but these policies can be expensive and do not 
fully protect beneficiaries from catastrophic out-of-pocket expenses. 
Medigap policies that provide drug coverage offer only limited 
protection from prescription drug expenses because of high cost-sharing 
and low coverage caps. The extent to which the president's proposed 
plan types--which include catastrophic coverage protection, a 
prescription drug benefit, and beneficiary cost-sharing requirements--
would address these shortcomings will depend on the details of the new 
policies.
Medigap Fills Some Needs
    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 selecting from among a group of 
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 employer-sponsored retiree benefits. In fact, most 
Medicare beneficiaries who do not otherwise have employer-sponsored 
supplemental coverage, Medicaid, or Medicare+Choice plans purchase 
Medigap policies, demonstrating the value of this coverage to the 
Medicare population.
Medigap Policies Can Have High Premiums
    Medigap policies can be expensive. In 1999, the average annual 
Medigap premium was more than $1,300. Premiums varied based on the 
level of coverage purchased. Plan A, which provides the fewest 
benefits, was the least expensive, with average premiums of nearly $900 
per year. (See table 3.) The most popular plans--C and F--had average 
premiums of about $1,200. The most comprehensive plans that provide 
some drug coverage--I and J--were the most expensive, with average 
annual premiums around $1,700.

 TABLE 3: DISTRIBUTION OF MEDIGAP PLANS AND ANNUAL PREMIUMS PER COVERED
                               LIFE, 1999
------------------------------------------------------------------------
                                                       Average annual
     Medigap plan      Covered lives (percentage)         premium
------------------------------------------------------------------------
A                      2.7                         $877
------------------------------------------------------------------------
B                      7.8                         1,093
------------------------------------------------------------------------
C                      15.7                        1,158
------------------------------------------------------------------------
D                      3.7                         1,032
------------------------------------------------------------------------
E                      1.5                         1,067
------------------------------------------------------------------------
F                      22.9                        1,217
------------------------------------------------------------------------
G                      1.5                         981
------------------------------------------------------------------------
H                      1.4                         1,379
------------------------------------------------------------------------
I                      1.5                         1,698
------------------------------------------------------------------------
J                      2.6                         1,672
------------------------------------------------------------------------
Prestandard (policies  34.9                        1,525
 sold before July
 1992)
------------------------------------------------------------------------
Plans in states in     4.0                         1,368
 which insurers are
 exempt from offering
 standardized plan a
------------------------------------------------------------------------
Total b                100.0 c                     1,311
------------------------------------------------------------------------
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 the National Association of Insurance
  Commissioners (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 not included in the
  table.
c Percentages do not add to 100 due to rounding.
Source: GAO analysis of data collected by the NAIC from the 1999
  Medicare Supplement Insurance Experience Exhibit.

                              ----------                              

    Medigap premiums also varied across geographic areas and insurers. 
For example, in 1999, average annual premiums in California were 35 
percent higher than the national average for policies conforming to the 
standard plans. While premiums may reflect geographic differences in 
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.14 For example, in Illinois, 
plan A premiums for a 65-year-old ranged from $467 to $1,202, depending 
on the insurer. Similarly, in New York, plan F premiums for a 65-year-
old ranged from $1,617 to $2,800, and in Texas, plan J premiums ranged 
from $2,059 to $5,658.
---------------------------------------------------------------------------
    \14\ Premium quotes are from 2000 and 2001 state consumers guides 
on Medigap policies.
---------------------------------------------------------------------------
    Medigap policies are becoming more expensive. One recent study 
reported that, from 1999 to 2000, premiums for the three Medigap plan 
types offering prescription drug coverage (H, I, and J) increased the 
most rapidly--by 17 to 34 percent. Medigap plans without prescription 
drug coverage rose by 4 to 10 percent.15
---------------------------------------------------------------------------
    \15\ Weiss Ratings Inc, ``Prescription Drug Costs Boost Medigap 
Premiums Dramatically,'' (Palm Beach Gardens, Fla.: Mar. 26, 2001). 
http://www.weissratings.com/NewsReleases/Ins--Medigap/
20010326Medigap.htm (downloaded May 3, 2001).
---------------------------------------------------------------------------
    A major reason premiums are high is that a significant share of 
premium dollars is used for administrative costs rather than benefits. 
On average, 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.16 
The share of premiums spent on benefits varies significantly among 
carriers. The 15 largest sellers of Medigap policies spent from 64 to 
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. In comparison, 98 percent of Medicare fee-for-service funds 
are used for benefits.
---------------------------------------------------------------------------
    \16\ Federal law requires Medigap plans to spend at least 65 
percent of premiums over time on benefits for policies sold to 
individuals and 75 percent for policies sold to groups. See 42 USC 
Sec. 1395ss(r)(1)(A).
---------------------------------------------------------------------------
Medigap Provides Limited Coverage for Prescription Drugs
    Medigap policies can leave beneficiaries exposed to significant 
out-of-pocket costs for prescription drugs. Medigap policies with a 
drug benefit are expensive, yet the drug benefit offered can be of 
limited value to many beneficiaries. The Medigap annual prescription 
drug benefit has a $250 deductible, requires 50 percent coinsurance, 
and limits coverage to $1,250 or $3,000, depending on the plan 
purchased. These dollar amounts have not been increased since they were 
established in 1992. As a result of the deductible and coinsurance 
provisions, a beneficiary with Medigap plan type J would have to incur 
$6,250 in prescription drug costs to get the full $3,000 benefit. 
Moreover, Medigap policies offering drug coverage typically cost much 
more than policies without drug coverage. For example, plan type J--the 
most popular plan with prescription drug coverage--costs, on average, 
$450 a year more than the most popular plan without drug coverage (plan 
F).
    Having a Medigap policy with drug coverage versus one without has 
little effect on beneficiaries' out-of-pocket spending on drugs. In 
1998, Medigap policyholders with prescription coverage spent, on 
average, $548 out of pocket on prescription drugs. Medigap paid only 27 
percent of policy holders drug costs. Medigap policyholders without 
prescription drug coverage spent, on average, $618 out of pocket on 
drugs--about 13 percent more than beneficiaries with drug coverage.
    The high cost and limited benefit of existing Medigap plans may 
explain why more than 90 percent of beneficiaries with Medigap coverage 
purchased standard plans that do not include drug 
benefits.17 Another reason is that, in most states, 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. For those 
beneficiaries, insurers may either deny coverage or charge higher 
premiums.
---------------------------------------------------------------------------
    \17\ While less is known about the benefits offered by 
prestandardized plans that were sold prior to 1992--representing about 
one-third 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 Increases Medigap Premiums and Weakens Medicare's 
        Cost Control Features
    The most popular Medigap plans are fundamentally different from 
other health insurance policies, which typically include cost-sharing 
provisions in the form of deductibles, coinsurance, and copayments. 
Cost-sharing requirements are intended to make beneficiaries aware of 
the costs associated with the use of services and encourage them to use 
these services prudently. In contrast, Medigap's first-dollar 
coverage--the elimination of any deductibles or coinsurance associated 
with the use of covered services--undermines this objective. All 
standard Medigap plans cover hospital and physician coinsurance, with 
some of them also covering the full hospital deductible, skilled 
nursing facility coinsurance, or the part B deductible. Nearly all 
beneficiaries purchasing a standard Medigap plan choose one that covers 
the full hospital deductible, and most select plans that cover the full 
skilled nursing home coinsurance and part B deductible. The president's 
proposed plan types would be different from the existing popular 
Medigap plans in that they would not include first-dollar coverage.
    Medigap's first-dollar coverage reduces financial barriers to 
health care, but it also diminishes beneficiaries' sensitivity to costs 
and likely increases beneficiaries' use of services, adding to total 
Medicare spending. Having first-dollar coverage may also add to Medigap 
premiums. The extra spending induced by first-dollar coverage causes 
insurers' outlays to rise and likely increases Medigap premiums. The 
premiums may increase not only to cover the additional expected health 
care expenses but also insurers' administrative costs.
    Our analysis and other research indicate that Medicare spends more 
on beneficiaries with supplemental insurance than on beneficiaries who 
have Medicare coverage only. For example, our analysis of the 1998 
Medicare Current Beneficiary Survey data found that annual Medicare 
expenditures for beneficiaries with Medigap insurance were about $2,000 
higher than for beneficiaries with Medicare only.18 Medicare 
annual spending for beneficiaries with employer-sponsored plans was 
about $1,700 higher than for beneficiaries with Medicare only.
---------------------------------------------------------------------------
    \18\ GAO-01-941.
---------------------------------------------------------------------------
    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) compared to beneficiaries who did not have supplemental 
insurance but were otherwise similar in terms of age, sex, income, 
education, and health status.19 Service use among 
beneficiaries with employer-sponsored supplemental insurance was 
approximately 17 percent higher than the service use of beneficiaries 
with Medicare coverage only.
---------------------------------------------------------------------------
    \19\ Sandra Christensen, Ph.D. and Judy Shinogle, M.S., ``Effects 
of Supplemental Coverage on Use of Services by Medicare Enrollees,'' 
Health Care Financing Review 19 (1997).
---------------------------------------------------------------------------
    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 fee-for--service program, Medicare+Choice plans require 
referrals or prior authorization for certain services to minimize 
unnecessary utilization.
    Under the president's Medigap proposal, the two new plan types 
would require beneficiary cost-sharing and, in this way, would be 
similar to the features of employer-sponsored insurance plans. In 
eliminating first-dollar coverage, the proposal seeks to keep the new 
policies more affordable for beneficiaries and create incentives to 
restrain overall program spending.
Concluding Observations
    Interest remains high in improving supplemental coverage available 
to Medicare beneficiaries while fostering the prudent use of health 
care services. The president's proposal to create two new plan types 
that require cost-sharing and provide coverage for prescription drugs 
seeks to balance access and affordability with incentives for 
beneficiaries to be cost-conscious. The exclusion of first-dollar 
coverage from the new Medigap policies would make them more like 
employer-sponsored supplemental insurance policies that include 
incentives to minimize unnecessary use. These reforms could serve the 
interests both of beneficiaries and the program, making drug coverage 
more affordable while helping to moderate program expenditures. Details 
of the president's proposal will reveal the extent to which the new 
plan types offer better value for beneficiaries' premium dollars than 
the existing Medigap plan types. In our view, an effective health 
insurance plan would discourage the inappropriate use of services and 
protect beneficiaries from catastrophic health expenses, including 
prescription drug costs. We look forward to working with this 
subcommittee as it considers various options to reform Medigap and 
improve health care coverage for individuals.
    Madam Chairwoman, this concludes my statement. I would be happy to 
answer any questions that you or members of the subcommittee may have.
Contacts and Acknowledgments
    For more information regarding this testimony, please contact me or 
James Cosgrove at (202) 512-7118. Other contributors to this product 
were Rashmi Agarwal, John Dicken, Hannah Fein, Jennifer Podulka, and 
Lisa Rogers.
    (290178)

                                

    Chairman Johnson. Thank you very much. Dr. Young, a 
pleasure to have you with us today, as well.

STATEMENT OF DONALD A. YOUNG, M.D., PRESIDENT, HEALTH INSURANCE 
                     ASSOCIATION OF AMERICA

    Dr. Young. Thank you, Mrs. Johnson, distinguished Members 
of the Subcommittee. I am Donald Young, M.D., President of the 
Health Insurance Association of America (HIAA). The HIAA's 
nearly 300 members provide health, long-term care, dental, 
disability----
    Chairman Johnson. Don, could you get a little closer to the 
microphone, please?
    Dr. Young. Dental, disability, and Medicare supplemental 
coverage to more than 100 million Americans. We commend the 
President for his leadership, and this Committee for the 
efforts you are making to develop Medicare and Medigap policies 
that will better meet the needs and expectations of Medicare 
beneficiaries. And we greatly appreciate the opportunity to 
join in today's discussion.
    Plans to supplement Medicare fill important gaps in 
Medicare coverage. About 20 million seniors have such 
supplemental coverage, either through an employer-sponsored 
retiree health plan, or through an individually purchased 
Medigap plan. Many other seniors have supplemental coverage 
through Medicare+Choice or Medicaid.
    Surveys done by government agencies and by private 
pollsters regularly confirm that Medigap policy holders are 
satisfied or very satisfied with their coverage, and consider 
the policies a good or excellent value.
    However, making improvements to Medicare benefits, 
especially with respect to prescription drug coverage, also 
means that the design of Medicare supplemental products would 
need to be reexamined. The President has devoted considerable 
attention to Medicare coverage gaps relating to prescription 
drugs, and recently proposed several mechanisms to help 
Medicare beneficiaries with these costs.
    One of these mechanisms would involve the creation of two 
new Medigap plans. These plans are intended to offer enhanced 
coverage for prescription drugs, protect beneficiaries against 
catastrophic illness, and provide for nominal beneficiary cost 
sharing. And we heard more details about them just recently.
    During 2000 and 2001, the National Association of Insurance 
Commissioners (NAIC) undertook a reexamination of the 10 
standardized Medigap policies. The NAIC working group conferred 
with consumer representatives, State and Federal regulators, 
Medicare supplement insurance carriers, and their trade 
associations, including HIAA. Their final report contains a 
list of possible revisions for further consideration.
    However, the report emphasizes that in the absence of 
overall Medicare reform, the implementation of incremental 
changes to Medigap may be ill advised, given the need for 
regulatory changes at the State level, the need for beneficiary 
education, and the potential for adverse selection.
    I would like to offer a few recommendations about Medigap 
reform. First, since the design of any new or revised Medigap 
plans would be heavily dependent upon the features of a 
modernized Medicare program, we believe that Congress should 
make final decisions about the Medicare program itself, and 
then proceed to address corresponding Medigap issues.
    Second, changes affecting Medigap should be made at one 
time, and not in an incremental or piecemeal fashion. Making 
Medigap changes in two or more rounds of reform would increase 
administrative costs and increase beneficiary confusion.
    Third, we suggest that Congress allow a process similar to 
that used under the Omnibus Reconciliation Act 1990 for any 
mandated redesign of Medigap benefits. In 1990, the Congress 
did not specify in statute the contents of the 10 standardized 
Medigap plans we have today; but instead, called for the NAIC 
to bring together consumer representatives, State regulators, 
and insurers, to design Medigap benefit options. We believe it 
would be in the best interests of consumers to follow the same 
approach at the proper time.
    Finally, it is important to remember that when it comes to 
Medigap, Medicare beneficiaries are the customers. They are 
free to buy, or to not buy, available products. Whatever we do 
must be viewed as beneficial, not harmful, to the interests of 
the typical Medicare beneficiary, and result in Medigap 
products that provide value and are affordable.
    I will end by emphasizing that in the context of broader 
Medicare benefit modernization, HIAA certainly understands the 
need to take a fresh look at Medigap. We wish to bring the 
experience and views of our Member companies to this 
Committee's efforts to reexamine the structure of Medigap 
benefits and related matters.
    Thank you again for giving me this opportunity to appear 
before you today, and I would be happy to take any questions 
you may have.
    [The prepared statement of Dr. Young follows:]
    Statement of Donald A. Young, M.D., President, Health Insurance 
                         Association of America

                              Introduction

    Mr. Chairman, distinguished members of the Subcommittee, I am 
Donald A. Young, MD, President of the Health Insurance Association of 
America (HIAA). HIAA is the nation's most prominent trade association 
representing the private health care system. Its nearly 300 members 
provide health, long-term care, dental, disability, and supplemental 
coverage to more than 100 million Americans. Many of HIAA's members 
provide Medicare supplemental insurance products, including individual 
Medigap policies, and we, therefore, greatly appreciate the opportunity 
to join in today's discussion.

                         Current Medigap Market

    Because Medicare was designed with deductibles and coinsurance, 
with limits on covered services, and with certain services not covered 
at all, there have been gaps in coverage from the very beginning. In 
fact, it's been estimated that Medicare covers only about half of the 
health care costs incurred by seniors and other beneficiaries, leaving 
many at significant financial risk for illness. Medicare supplemental 
insurance was designed to address this financial risk. Approximately 20 
million seniors have Medicare supplemental coverage, either through an 
employer-sponsored plan for retirees (11.5 million beneficiaries) or 
through an individually purchased Medigap plan (8.4 million 
beneficiaries). Many other seniors have supplemental coverage through 
Medicare+Choice (5.5 million) or Medicaid (3.8 million). About 4.3 
million beneficiaries have no supplemental coverage.1
---------------------------------------------------------------------------
    \1\  Laschober, Mary A., Michelle Kitchman, Patricia Newman, and 
Allison A. Strabic, ``Trends in Medicare Supplemental Insurance and 
Prescription Drug Coverage, 1996-1999,'' Health Affairs, February 27, 
2002. Figures are for fall 1999, except for Medicare+Choice (6.0 
million in fall 1999), which has been updated by CMS data to February 
2002.
---------------------------------------------------------------------------
    In 1990 Congress mandated the creation of 10 standardized Medigap 
plans, Plans A through J. In addition, two high deductible policies 
were authorized by the Balanced Budget Act of 1997. Three of the 10 
standardized plans, H, I and J, and the J high deductible plan, provide 
limited coverage for prescription drugs.

                  Popularity of Medigap Among Seniors

    Surveys conducted bi-annually by the Inspector General of the 
Department of Health and Human Services continue to show a high level 
of satisfaction among seniors with their Medigap coverage. A survey 
conducted last summer by a private company, American Viewpoint, found 
that 89 percent of respondents were satisfied or very satisfied with 
their Medigap coverage, while 76 percent of respondents said that, 
considering the premiums they pay, the policies are a good or excellent 
value. What they value most is peace of mind from knowing what their 
medical costs will be and the lack of paperwork--they don't have to 
hassle with medical bills. The vast majority (81%) would recommend 
Medigap coverage to a friend or relative when they turn 65 and enroll 
in Medicare.2
---------------------------------------------------------------------------
    \2\  AmericanViewpoint, National Medigap Enrollees Survey, 
Conducted for the Coalition to Preserve Choice for Seniors, June 22-
July 1, 2001.
---------------------------------------------------------------------------

                           Transition Issues

    In considering potential changes to Medigap, it is important to 
understand that essentially any change would raise a variety of 
transition issues that would need to be very carefully addressed. I'd 
like to take a few minutes to discuss the most important of these.
    Treatment of old policies. One very important element of any 
Medicare and Medigap reform is the treatment of current Medigap 
policyholders. Public policy must be carefully crafted to support a 
stable supplemental insurance market and avoid adverse selection. When 
the 10 standardized plans were implemented in the early '90s, 
beneficiaries were granted a 6-month open enrollment period, during 
which they could purchase any of the new policies available in their 
state. They also were allowed to keep their pre-standardized policy 
instead of buying one of the new policies, if they preferred. The one-
time opportunity to choose the desired level of supplemental coverage 
protects the market and the plans with richer benefits from rate 
spirals that result from adverse selection.
    We envision a very different transition in the context of 
comprehensive Medicare and Medigap reform. Standardized policies A-J 
were designed to mesh with the current Medicare benefit structure. 
Comprehensive reform, which may entail eliminating the Part A and Part 
B distinction or otherwise changing the structure of beneficiary cost-
sharing, will require that new standardized supplemental policies be 
defined which mesh with the new Medicare covered benefits. In that 
case, policyholders with plans A-J would most likely need to transition 
to new supplemental policies, and policies A-J would be retired. Having 
a one-time, limited open enrollment opportunity for the new 
supplemental policies, in the context of comprehensive reform, should 
be workable (in terms of the hazards of adverse selection) because all 
beneficiaries (the more healthy and less healthy) will be moving into 
the new policies.
    Regulatory implementation. Another important element of transition 
from current Medigap offerings to new supplemental policies is 
regulatory implementation. In a process created by OBRA 1990, Congress 
preserved for the States (and the National Association of Insurance 
Commissioners (NAIC)) the role of defining detailed standards and 
regulating Medigap carriers. Thus, after Congress enacts guidelines for 
reformed supplemental benefits, the NAIC must design new standardized 
policies and develop model regulations, and the Department of Health 
and Human Services must adopt the NAIC model as part of the federal 
requirements. Subsequently, each state must change its laws and 
regulations to implement the new requirements, to ensure that state 
requirements are at least as stringent as federal requirements.
    Since states play a central role in regulating Medigap insurance, 
Congress must recognize that this process takes time, and the 
implementation period must be sufficiently long to allow for this. The 
timeline set under the BBA for implementing the new standardized high 
deductible policies was too short, and much confusion resulted. On the 
other hand, we also believe that the NAIC would need to consider some 
form of ``speed to market'' arrangement for any reformed Medigap plan 
offerings so that the opportunity for beneficiaries to purchase better 
coverage is not unduly delayed.
    Education. Yet another very important element of transition is 
education. Clearly provisions for adequate regulator, insurer, agent, 
and beneficiary education are essential in order for beneficiaries to 
receive the supplemental insurance options intended by Congress. 
Because reeducation in the Medigap market is such a massive 
undertaking, and because the market has experienced much stress in 
recent years, the frequency with which Congress changes Medigap 
standards should be kept to a minimum.

                  NAIC Consideration of Medigap Reform

    In considering Medigap reform, we believe it is useful to review 
recent efforts by the NAIC. In 2000 and 2001, the NAIC undertook a 
reexamination of the 10 standardized Medigap policies, assigning the 
task to the Medicare Supplement Working Group. In conducting its 
examination, the Working Group conferred with consumer representatives, 
state and federal regulators, Medicare supplement insurance carriers 
and their trade associations, including HIAA. Through a seven-month 
structured fact-finding process, the Working Group elicited statistical 
data, information and opinions from the various interested parties. 
And, at the 2000 NAIC Winter National Meeting, the working group held a 
public hearing.
    The final report of the Working Group,3 adopted by the 
NAIC Health Insurance & Managed Care (B) Committee on December 10, 
2001, contains a list of possible revisions for further consideration--
but only in the context of comprehensive Medicare reform. Importantly, 
the report highlights a number of concerns about the prospect of 
numerous, incremental changes to Medigap. In this regard, relevant 
excerpts from the report include the following:
---------------------------------------------------------------------------
    \3\ ``Report on Revisiting Medicare Supplement Insurance 
Standardized Plans,'' Final Report of the Medicare Supplement Working 
Group of the NAIC Senior Issues Task Force. December 10, 2001
---------------------------------------------------------------------------
         ``In the absence of comprehensive Medicare and Medigap 
        reform, which would need to contain appropriate transitional 
        periods for relevant Medigap blocks of business and 
        implementation of amended state regulations, most interested 
        parties cautioned against incremental changes to the Medigap 
        benefit design.''
         ``It is important to note [that] frequent changes in 
        Medigap benefits are costly and confusing to beneficiaries.''
         ``Any revision to the [Medigap] standardized plans 
        must consider the transition issues that involve regulatory 
        changes, beneficiary education, and adverse selection where 
        existing plans are grandfathered.''
    The Working Group's report does present a number of suggested 
modifications to Medigap benefits ``if larger Medicare reform is 
adopted, thus necessitating changes to Medigap.'' Examples include the 
following:
         Delete coverage for services that are now Medicare 
        covered services (e.g. certain preventive benefits), or that 
        are no longer needed due to Medicare program changes (e.g. 
        coverage for excess charges, coverage for at home recovery).
         Consider including new benefits (e.g. cost-sharing for 
        Medicare hospice benefit).
         Include deductibles and copayments/coinsurance to 
        create incentives for appropriate service utilization.
         Have fewer standardized plans.
         Allow use of benefit utilization controls such as 
        tiered drug formularies in those Medigap plans that include 
        prescription drug coverage.

                   The Issue of First-Dollar Coverage

    The announcement for this hearing expressed concern about the fact 
that many of the Medigap plans purchased by seniors cover Medicare Part 
A and Part B deductibles as well as Part A copayment and Part B 
coinsurance amounts. This is typically referred to as first-dollar 
coverage. The concern is that first-dollar coverage, by lessening 
beneficiary price sensitivity, may increase Medicare spending, perhaps 
inappropriately.
    This is not a new issue, and things are not as simple as they might 
first appear. To begin with, not all Medigap plans provide full first-
dollar coverage. However, it is certainly true that those that do are 
the most popular plans among the nation's seniors. Medigap plans C, F 
and J are the three that cover both the Part A and Part B deductibles. 
These three plans are twice as popular as the other seven plans 
combined. This popularity is likely due to the fact that Medicare 
beneficiaries are risk averse and derive a great deal of financial and 
personal security from their supplemental insurance policies.
    Moreover, under the Balanced Budget Act of 1997, Congress provided 
for two, new high-deductible Medigap products. However, few such plans 
have actually been sold, and there are reports that the biggest hurdle 
to the sale of these products is overcoming beneficiary expectations 
that a Medigap plan will provide first-dollar coverage. Thus, any 
Congressional plan to restrict Medigap first-dollar coverage of 
deductibles and other cost-sharing obligations is likely to require 
considerable Medicare beneficiary education and involvement in order to 
overcome expected beneficiary resistance to this idea.
    Second, if Medicare spending is higher for beneficiaries who 
purchase a Medigap plan with first-dollar coverage, it cannot 
automatically be assumed that such spending is for medically 
inappropriate or unnecessary services. Medicare's existing coverage and 
utilization review mechanisms are specifically designed to assure that 
Medicare pays only for items and services that are reasonable and 
necessary. Medicare supplemental insurers do not make independent 
coverage decisions. Thus, attempts to move away from first-dollar 
coverage might in fact impose barriers to the receipt of necessary 
care. A special study performed a few years ago for HIAA by Gerard 
Anderson and his colleagues at Johns Hopkins noted that the burden of 
Medicare cost-sharing is distributed unequally across beneficiaries, 
increasing as they become older, develop chronic illnesses, or have 
catastrophic illnesses.4 Supplemental insurance spreads this 
risk, thereby reducing the financial burden on older beneficiaries and 
those with chronic or catastrophic illnesses.
---------------------------------------------------------------------------
    \4\  Anderson, GF; Wiest, A; Shaffer, T; Hussey, P; and Bilenker, 
J. Concerns About the Theory of Increased Cost-Sharing for Medicare 
Beneficiaries and Its Policy Implications for the Medicare Program. 
Washington, DC: Health Insurance Association of America, 1999.
---------------------------------------------------------------------------
    Dr. Anderson's study also noted that the available literature 
suggested that Medicare beneficiaries' price sensitivity is greatest 
for preventive and physician services. According to Dr. Anderson's 
study, Medicare beneficiaries without supplemental insurance were much 
less likely to have flu shots, mammograms, and pap smears. For this and 
other reasons, Dr. Anderson cautioned that comparisons of the Medicare 
expenditures incurred by beneficiaries with supplemental coverage and 
those who do not overestimate the effect of supplemental insurance on 
Medicare spending.
    Even the celebrated RAND Health Insurance Experiment, which 
investigated the impact of cost-sharing on health care utilization by a 
non-elderly population, found that when faced with cost-sharing, 
individuals were just as likely to limit the use of ``highly 
effective'' care as ``less effective'' care. Thus, as far as we can 
determine, the Medicare savings predicted from restrictions on first-
dollar coverage of Medicare deductible and coinsurance amounts would, 
at least to some extent, be due to the fact that beneficiaries would be 
discouraged from seeking medically appropriate care. In a report last 
year, the Congressional Budget Office acknowledged that ``the decrease 
in use of services by Medigap policyholders'' produced by restrictions 
on first-dollar coverage ``might not be limited to unnecessary care, so 
the health of some policyholders might be adversely 
affected.''5
---------------------------------------------------------------------------
    \5\  Congressional Budget Office, Budget Options, February 2001.
---------------------------------------------------------------------------

                         Medigap Benefit Design

    The committee's announcement for this hearing also questioned the 
value of one of the prescribed benefits for most Medigap policies, 
foreign travel insurance, asserting that most beneficiaries never leave 
their home country. This benefit covers 80 percent of the medically 
necessary emergency care received in a foreign country, after a $250 
deductible, up to a lifetime maximum of $50,000.
    Ideally, any redesign of Medigap benefits would take account of the 
needs and preferences of today's seniors. Many seniors do travel 
outside the United States, and may well value the peace of mind 
associated with Medigap coverage when they do so. On the other hand, if 
a benefit is infrequently used, it does not contribute very much to 
product pricing, and so dropping the benefit would not, by itself, 
produce much benefit.
    In this regard, it also needs to be remembered that current law 
requires that Medigap products be guaranteed renewable. This means that 
a Medigap policy may not be cancelled or have its benefits changed. 
Thus, any revisions to current Medigap benefits would raise very 
important transition issues, which are likely to be complex and 
difficult to resolve.
    In the case of the elderly, many of whom suffer from chronic 
illnesses, treatment costs for such things as prescription drugs and 
regular physician office visits can be more or less predictable. This 
relative predictability certainly permits each beneficiary to make a 
reasoned economic judgment about the expected near-term value of an 
insurance product. In other words, beneficiaries can be expected to do 
the math, comparing anticipated benefits with known premium costs. This 
raises the potential that healthier Medicare beneficiaries will seek 
out lower cost Medigap products or even decide to self-insure, thereby 
further driving up the average costs of coverage for those remaining 
behind. As insurers know only too well, benefit redesign, if not very 
carefully done, can lead to adverse selection and ultimately make the 
re-designed insurance product simply unaffordable for the average 
citizen.

                     Bush Administration Proposals

    As part of his fiscal year 2003 budget plan, President George W. 
Bush has proposed several mechanisms for providing prescription drug 
benefits for Medicare beneficiaries. One of these would involve the 
creation of two new Medigap plans. These plans would offer prescription 
drug coverage, protect beneficiaries against catastrophic illness, and 
include nominal beneficiary cost-sharing, all presumably for a lower 
premium cost than the most popular Medigap plans today.
    To date, few details have been released about the exact nature of 
the benefits for the two new Medigap plans or how they would be 
implemented. For example, the degree to which the new products would or 
would not provide coverage for Medicare deductibles and other 
beneficiary cost-sharing obligations has not been spelled out. The 
Administration maintains that the new plans will offer better benefits 
at a lower premium than the most popular Medigap plans today. However, 
it seems more likely that these new policies would require premiums 
comparable to, or even higher than, the premiums for today's most 
popular policies, especially since they promise more generous 
prescription drug benefits than current Medigap policies, catastrophic 
expense protection, and only ``nominal'' beneficiary cost sharing 
obligations.
    Furthermore, there appears to be considerable risk that the new 
Medigap products would be subject to adverse selection, since they 
would be more likely to appeal to beneficiaries expecting high health 
care utilization (e.g., high prescription drug costs). This risk, would 
likely discourage Medigap carriers from offering the new products, 
especially since they would expect to find it difficult to secure from 
state regulators future rate adjustments needed to cover the level of 
cost increases induced by adverse selection and rising prescription 
drug costs. In this context, it goes without saying that Medigap 
carriers would strongly oppose any attempt to require them to offer the 
new Medigap options. Such a mandate could prompt some carriers to exit 
the Medigap market entirely.
    HIAA certainly looks forward to getting more information about the 
President's Medigap proposal and to helping the Congress assess its 
various components. We certainly share everyone's desire to find ways 
to better meet the needs of Medicare beneficiaries.

                 HIAA's Recommendations to the Congress

    What I have tried to do today is to provide a context for the 
understandable desire to reform not only the basic Medicare program, 
but Medigap coverage options as well. I hope it is apparent that even 
the most tempting Medigap reforms would need to navigate some difficult 
ground. The design of any new or revised Medigap plans would, of 
course, be heavily dependent upon the features of a modernized Medicare 
program. Thus, it seems to us that the Congress should first make 
decisions about the Medicare program itself, and then proceed to 
address corresponding Medigap issues.
    HIAA also believes that changes to Medigap policies should be done 
in conjunction with comprehensive changes in Medicare benefits, and not 
before that time. Further, changes affecting Medigap should be made at 
one time and not in an incremental or piecemeal fashion. Making Medigap 
changes in two or more ``rounds of reform'' would add significantly 
more administrative costs to the system than making such changes at one 
time, and would likely increase beneficiary confusion.
    We would also suggest that Congress provide as much flexibility as 
possible for any mandated redesign of Medigap benefits. As you know, 
under the Omnibus Budget Reconciliation Act of 1990, the Congress did 
not specify the contents of the 10 standardized Medigap plans we have 
today, but instead allowed for a process where consumer 
representatives, state regulators, and insurers worked together to 
design Medigap benefit options. Similarly, we believe that it would be 
extremely risky for Congress to mandate by statute the contents of 
insurance products intended for voluntary sale and purchase in the 
private marketplace.
    Finally, to state the obvious, when it comes to Medigap, Medicare 
beneficiaries are the customers, and they are free to buy--or not buy--
available products. In the end, whatever we do must be viewed as 
beneficial, not harmful, to the interests of the typical Medicare 
beneficiary, and result in Medigap products that are affordable.

                               Conclusion

    I hope that my testimony today helps elucidate the many issues that 
arise in any consideration of changes to Medigap. HIAA is open to 
considering Medigap reforms, such as those catalogued in the NAIC 
Medicare Supplement Working Group report, in the context of broader 
reform of Medicare covered benefits. However, without knowing how the 
core Medicare benefit package is structured, it is difficult, if not 
impossible to properly evaluate the merit of individual Medigap reform 
suggestions. In addition, some suggestions may not be well received by 
Medicare beneficiaries, could risk subjecting Medigap plans to adverse 
selection, or might otherwise endanger the important goal of 
maintaining affordable Medigap products. In any case, HIAA and its 
member companies look forward to working with this committee to craft 
feasible Medicare and Medigap policies that will meet the needs and 
expectations of Medicare beneficiaries.
                               __________

                        HIAA Traditional Members
 
 
 
Academy Life Insurance Company--     Manhattan National Life Insurance
 Frazer, PA                           Company--Carmel, IN
AEGON USA, Inc.--Baltimore, MD       Mayflower Insurance Company, Ltd.--
                                      New York, NY
AF&L Insurance Company--Warrington,  Mayflower National Life Insurance
 PA                                   Company--Indianapolis, IN
Affiliated Health Plans, Inc.--      McKinley Life Insurance Company--
 Thousand Oaks, CA                    Canton, OH
AFLAC--Columbus, GA                  MedAmerica Insurance Company--
                                      Pittsburgh, PA
American Casualty Company--Chicago,  MedAmerica Insurance Company of New
 IL                                   York--Rochester, NY
American Casualty Company of         Mennonite Mutual Aid Association--
 Reading, Pennsylvania--Reading, PA   Goshen, IN
American Family Mutual Insurance     Metropolitan Life Insurance
 Company--Madison, WI                 Company--New York, NY
American Fidelity Assurance          Mid-South Insurance Company--Omaha,
 Company--Oklahoma City, OK           NE
American Heritage Life Insurance     MMA Insurance Company--Goshen, IN
 Company--Jacksonville, FL
American Medical Security Life       Monitor Life Insurance Company of
 Insurance Co of GA--Green Bay, WI    New York--Utica, NY
American Medical Security, Inc.--    Montgomery Ward Insurance Company--
 Green Bay, WI                        Schaumburg, IL
American Republic Insurance          Monumental General Insurance
 Company--Des Moines, IA              Company--Baltimore, MD
American Specialty Health            Monumental Life Insurance Company--
 Incorporated--San Diego, CA          Baltimore, MD
American Specialty Health Plans of   Munich American Reassurance
 California, Inc.--San Diego, CA      Company--Atlanta, GA
American Specialty Health Networks-- Mutual of Omaha Health Plans, Inc.--
 San Diego, CA                        Omaha, NE
American Specialty Health Care,      Mutual of Omaha Insurance Company--
 Inc.--San Diego, CA                  Omaha, NE
American Specialty Health IPA of     National Fire Insurance Company of
 New York, Inc.--San Diego, CA        Hartford--Farmington, CT
AON Corporation Group--Chicago, IL   National-Ben Franklin Insurance
                                      Company of Illinois--Chicago, IL
AUL Long Term Care Solutions, Inc.-- New England Financial--Boston, MA
 Avon, CT
AUL Reinsurance Management           New York Life Insurance Company--
 Solutions--Avon, CT                  New York, NY
AultCare--Canton, OH                 Niagara Fire Insurance Company--New
                                      York, NY
AUSA Life Insurance Company--        Olympic Health Management Systems,
 Purchase, NY                         Inc.--Bellingham, WA
Bankers Life and Casualty Company--  Optum--McLean, VA
 Chicago, IL
Bankers United Life Assurance        Pacific Insurance Company--New
 Company--Cedar Rapids, IA            York, NY
BC Life & Health Insurance Company-- Pacific Life & Annuity Company--
 Woodland Hills, CA                   Newport Beach, CA
Blue Cross and Blue Shield of        Pacific Life Insurance Company--
 Georgia, Inc.--Atlanta, GA           Newport Beach, CA
Blue Cross Blue Shield Healthcare    Pan American Insurance Company--San
 Plan of Georgia--Atlanta, GA         Juan, PR
Blue Cross of California--New Bury   Pension Life Insurance Company of
 Park, CA                             America--Frazer, PA
Boston Old Colony Insurance          Peoples Benefit Life Insurance
 Company--New York, NY                Company--Cedar Rapids, IA
Buckeye Union Insurance Company--    Physicians Mutual Insurance
 Columbus, OH                         Company--Omaha, NE
CaliforniaCare Health Plans--        Pioneer Life Insurance Company--
 Thousand Oaks, CA                    Carmel, IN
CHCS Services, Inc.--Weston, FL      Principal Financial Group--Des
                                      Moines, IA
Celtic Insurance Company--Chicago,   Principal Life Insurance Company--
 IL                                   Des Moines, IA
Central Reserve Life Insurance       Providian Life and Health Insurance
 Company--Strongsville, OH            Company--Frazer, PA
Central States Health & Life         Pyramid Life Insurance Company--
 Company of Omaha--Omaha, NE          Mission, KS
Ceres Group, Inc.--Strongsville, OH  Pyramid Services, Inc.--Danbury, CT
CNA--Chicago, IL                     QualChoice Health Plan, Inc.--
                                      Cleveland, OH
CNA Casualty Company of California-- Security General Life Insurance
 Los Angeles, CA                      Company--Oklahoma City, OK
CNA Lloyd's of Texas--Bellaire, TX   Senior American Life Insurance
                                      Company--Warrington, PA
Columbia Casualty Company--Chicago,  Sentry Insurance A Mutual Company--
 IL                                   Stevens Point, WI
Combined Insurance Company of        Sentry Insurance Group--Stevens
 America--Chicago, IL                 Point, WI
Combined Life Insurance Company of   Sentry Life Insurance Company--
 New York--Latham, NY                 Stevens Point, WI
Commercial Insurance Company of      Sentry Life Insurance Company of
 Newark, NJ--New York, NY             New York--Syracuse, NY
Commercial Travelers Mutual          Sentry Select Insurance Company--
 Insurance Company--Utica, NY         Stevens Point, WI
Companion Life Insurance Company--   Starmark--Lake Forest, IL
 Rye, NY
Conseco Direct Life Insurance        State Farm Fire and Casualty
 Company--Philadelphia, PA            Company-- Bloomington, IL
Conseco Health Insurance Company--   State Farm General Insurance
 Carmel, IN                           Company--Bloomington, IL
Conseco Life Insurance Company--     State Farm Insurance--Bloomington,
 Carmel, IN                           IL
Conseco Medical Insurance Company--  State Farm Mutual Automobile
 Carmel, IN                           Insurance Company--Washington, DC
Conseco Senior Health Ins. Co.--     Sterling Life Insurance Company--
 Carmel, IN                           Phoenix, AZ
Conseco Services, LLC--Rockford, IL  Stonebridge Insurance Company--
                                      Plano, TX
Conseco Variable Insurance Company-- Teachers Insurance and Annuity
 Carmel, IN                           Association--New York, NY
Conseco, Inc.--Carmel, IN            Teachers Protective Mutual Life
                                      Insurance Company--Lancaster, PA
Continental Assurance Company--      Transamerica Life Insurance &
 Chicago, IL                          Annuity Company--Charlotte, NC
Continental Casualty Company--       Transamerica Life Insurance Company
 Chicago, IL                          of New York--Purchase, NY
Continental General Insurance        Transamerica Occidental Life
 Company--Omaha, NE                   Insurance Company--Los Angeles, CA
Continental Insurance Company--New   Transcontinental Insurance Company--
 York, NY                             New York, NY
Continental Insurance Company of     Transportation Insurance Company--
 New Jersey--New York, NY             Chicago, IL
Continental Insurance Company of     Trustmark Insurance Company--Lake
 Puerto Rico--Chicago, IL             Forest, IL
Continental Lloyd's Company--        Trustmark Life Insurance Company--
 Chicago, IL                          Lake Forest, IL
Continental Reinsurance              UNICARE--Huntington Beach, CA
 Corporation--New York, NY
CoreSource--Anderson, IN             UNICARE Health Insurance of the
                                      Midwest--Chicago, IL
CoreStar--Lake Forest, IL            UniCARE Insurance Company--
                                      Camarillo, CA
Cost Care, Inc.--Huntington Beach,   UNICare Life & Health Insurance
 CA                                   Company--Springfield, MA
Country Life Insurance Company--     Union Fidelity Life Insurance
 Bloomington, IL                      Company--Fort Washington, PA
Destiny Health, Inc.--Bethesda, MD   United Behavorial Health--San
                                      Francisco, CA
Employers Dental Services, Inc.--    United HealthCare of Arizona, Inc.--
 Des Moines, IA                       Minnetonka, MN
Exclusive Healthcare, Inc.--Omaha,   United HealthCare of California,
 NE                                   Inc.--Minnetonka, MN
Federated Insurance Companies--      United HealthCare of Colorado,
 Owatonna, MN                         Inc.--Minnetonka, MN
Fidelity and Casualty Company of     United HealthCare of New Jersey,
 New York--New York, NY               Inc.--Minnetonka, MN
Firemen's Insurance Company of       United HealthCare of New York,
 Newark, New Jersey--New York, NY     Inc.--Minnetonka, MN
First Fortis Life Insurance          United HealthCare of the Midlands
 Company--Syracuse, NY                Inc--Omaha, NE
Fortis Benefits Insurance Company--  United HealthCare of Upstate New
 Kansas City, MO                      York, Inc.--Minnetonka, MN
Fortis Health--Milwaukee, WI         United HealthCare of Utah--Salt
                                      Lake City, UT
Fortis, Inc.--New York, NY           United of Omaha Life Insurance
                                      Company--Omaha, NE
Frontier National Life Insurance     United Resource Networks--
 Company--Carmel, IN                  Minneapolis, MN
GE Financial Assurance--Richmond,    United Wisconsin Life Insurance
 VA                                   Company--Green Bay, WI
GE Group Life Assurance Company--    United World Life Insurance
 Enfield, CT                          Company--Omaha, NE
General & Cologne Life Re of         UnitedHealth Group--Minnetonka, MN
 America--Stamford, CT
General Electric Capital Assurance-- UnitedHealthcare--Hartford, CT
 San Rafael, CA
Glen Falls Insurance Company--New    USAA Life Insurance Company--San
 York, NY                             Antonio, TX
Greater Georgia Life Insurance       Valley Forge Insurance Company--
 Company, Inc.--Atlanta, GA           Reading, PA
Guarantee Trust Life Insurance       Valley Forge Life Insurance
 Company-- Glenview, IL               Company--Reading, PA
Guardian Insurance & Annuity         Veterans Life Insurance Company--
 Company, Inc.--New York, NY          Frazer, PA
Guardian Life Insurance Company of   Wabash Life Insurance Company--
 America--New York, NY                Carmel, IN
Healthyroads, Inc.--San Diego, CA    Wausau Benefits, Inc.--Wausau, WI
Illinois Mutual Life Insurance       WellPoint Health Networks Inc.--
 Company--Peoria, IL                  Thousand Oaks, CA
J.C. Penney Life Insurance Company-- WellPoint Pharmacy Plan--Thousand
 Plano, TX                            Oaks, CA
John Alden Life Insurance Company--  Western Diversified Life Insurance
 Miami, FL                            Company--San Diego, CA
John Hewitt & Associates--Portland,  Woodmen of the World Life Insurance
 ME                                   Society--Omaha, NE
Kansas City Fire and Marine          World Insurance Company--Omaha, NE
 Insurance Company--New York, NY
Liberty Life Assurance Company of    Zurich American Insurance Company
 Boston-- Boston, MA                  of Illinois--Schaumburg, IL
Liberty Mutual Group--Boston, MA     Zurich American Insurance Group--
                                      New York, NY
Liberty Mutual Insurance Company--   Zurich American Life Insurance
 Dover, NH                            Company--Schaumburg, IL
Life Investors Insurance Company of  Zurich Insurance Company--
 America--Cedar Rapids, IA            Schaumburg, IL
LifeCare Assurance Company--         Zurich Life Insurance Company--
 Woodland Hills, CA                   Schaumburg, IL
LifePlans, Inc.--Waltham, MA         ...................................
 

                                

    Chairman Johnson. Thank you very much, Dr. Young. Jennifer 
Weiss, of the Medicare Rights Center in New York, nice to have 
you.

   STATEMENT OF JENNIFER WEISS, DIRECTOR OF POLICY, MEDICARE 
               RIGHTS CENTER, NEW YORK, NEW YORK

    Ms. Weiss. Thank you. Good afternoon. As Chairwoman Johnson 
said, my name is Jennifer Weiss, and I am the Director of 
Policy at the Medicare Rights Center. The Medicare Rights 
Center is a national consumer services organization based in 
New York that is dedicated to ensuring that older and disabled 
Americans get good, affordable health care. Every year we hear 
from more than 60,000 people with Medicare who have questions 
about their Medicare rights, benefits, and options. I thank the 
Ways and Means Subcommittee on Health for giving me this 
opportunity to testify on Medicare supplemental insurance 
options.
    For the older and disabled men and women we serve, there 
are three critical Medigap issues: They want meaningful and 
understandable Medigap policies, a good Medigap benefit 
package, and affordable Medigap coverage. To the extent Medigap 
reform proposals affect these key issues, on behalf of our 
clients, we ask that you tread carefully.
    As you well know, changes often have unintended 
consequences. Adding new Medigap plans that are not affordable, 
or that discourage access to needed care, will jeopardize the 
health of older and disabled Americans. Changes designed to 
save money by dissuading people from seeking the care they need 
may end up costing Medicare more in the long run, through 
future hospitalizations and through providing other complex 
health services.
    Any new Medigap option must be designed so that people can 
easily understand its risks and benefits. For example, there is 
incontrovertible evidence that Medigap standardization has been 
successful in allowing consumers a meaningful basis to 
comparison shop--a good thing for consumers and for the market.
    In an ideal world, there would be a simple answer to the 
question of how to design cost sharing in Medigap that strikes 
the right balance between ensuring that people who need care 
get care, and discouraging people from seeking unnecessary 
care. Finding that delicate balance requires a fair and 
objective review of our learning on health care usage.
    Based on our experience, we have two serious concerns that 
we raise here: One, plans that do not provide first-dollar 
coverage might deter enrollees from getting needed care. Two, 
plans that do not provide first-dollar coverage might draw a 
healthier pool of policy holders, which could lead Medigap 
insurers to raise rates on the less-healthy pool of policy 
holders who elect first-dollar coverage plans.
    Moreover, plans with high deductibles are not likely to 
attract customers. As you know, the two high-deductible plans 
currently available have few enrollees. Today, many more people 
sign up for plans that cover their high deductibles and high 
cost sharing than for less expensive plans that do not. In 
fact, most people even opt for plans that cost more but cover 
the modest part B deductible.
    Regardless of ideology, none of us wants a health care 
system that deters people from getting the care they need. At 
the same time, limited public resources should not be diverted 
to pay for care that is unnecessary. We need to understand 
clearly where the dividing line is.
    The tragedy that we hear at the Medicare Rights Center day 
after day is from our elderly clients who report that they go 
without needed care because they cannot afford it. As you well 
know, prescription drugs are the prime example of what we 
consider to be an inhumane and uncivilized deprivation in 
modern-day America. Remember, the Medicare population is a 
group of Americans who have a median income below $24,000 a 
year. Indeed, Members of the Committee, our neighbors are going 
without needed care as we meet here today.
    Our client experiences also tell us that Medigap policies 
are the mechanism through which our clients budget for their 
health care each month, enabling them to predict many of the 
costs they will face. Human beings, of course, are not 
clairvoyant and are hard-pressed to self-insure for unexpected 
high-cost health care needs. While a high-deductible Medigap 
plan may mean a beneficial lower monthly Medigap premium, it 
may also mean a gamble about future health care needs and out-
of-pocket health care costs.
    As this Committee considers ways to offer people with 
Medicare meaningful health care choices, encourage access to 
needed care, and discourage unnecessary care, we would urge you 
to look at Medicare as a mechanism for offering supplemental 
options. Adding supplemental coverage options to Medicare would 
allow the millions of people with disabilities under 65 the 
right to purchase coverage. It could also spread risk more 
broadly, and help stabilize supplemental insurance premiums. We 
wonder whether the CBO has ever scored this proposal to expand 
Medicare, and strongly recommend that you request further study 
of this option.
    To conclude, we strongly urge that before pushing forward 
with changes to Medigap, that you ask the GAO and the CBO to 
study these proposed changes and their potential consequences. 
Add to the current Administration proposals serious review of 
other options, such as a supplemental policy directly through 
Medicare.
    No one expected that the Balanced Budget Act of 1997 would 
lead to 2.2 million Americans losing their health maintenance 
organization (HMO) coverage, and thousands struggling to secure 
a Medigap policy. No one would want to offer a change to 
Medigap that impeded access to needed care. That said, the 
greatest barrier to getting care right now is the lack of a 
Medicare prescription drug benefit. Prescription drug coverage 
through Medigap has proven to be unworkable. Now is the time 
for Congress to expand Medicare to include prescription drug 
coverage for everyone. Thank you very much.
    [The prepared statement of Ms. Weiss follows:]
Statement of Jennifer Weiss, Director of Policy, Medical Rights Center, 
                           New York, New York
Introduction
    My name is Jennifer Weiss and I am the director of policy at the 
Medicare Rights Center. The Medicare Rights Center is a national 
consumer service organization, based in New York, working to ensure 
that older and disabled Americans get good, affordable health care. 
Under a contract with the New York State Office for the Aging, with 
funding from the Centers for Medicare and Medicaid Services, we operate 
New York State's Health Insurance Assistance Program hotline. Every 
year we hear from more than 60,000 people with Medicare, who have 
questions about their Medicare benefits, rights and options. We also 
operate a National Medicare HMO Hotline that assists elderly and 
disabled Americans who are struggling to get needed care and coverage 
from their HMOs. I thank the Ways and Means Subcommittee on Health for 
this opportunity to testify on Medicare Supplemental Insurance 
policies.
    For the older and disabled men and women we serve, there are three 
critical Medigap issues: they want meaningful and understandable 
Medigap choices, a good Medigap benefit package, and affordable Medigap 
coverage. To the extent Medigap reform proposals affect these key 
issues, on behalf of our clients, we ask that you tread carefully. As 
you well know, changes often have unintended consequences. Adding new 
Medigap plans that are not affordable, or that lead to increases in the 
premiums charged for other Medigap plans, or that discourage access to 
needed care, will jeopardize the health of older and disabled 
Americans. At the same time, changes designed to save money by 
discouraging access to needed care may end up costing Medicare more in 
future hospitalizations and other complex health services.
    Any new Medigap option must be designed so that people can easily 
understand its risks and benefits. For example, there is 
incontrovertible evidence that Medigap standardization has been 
successful in allowing consumers a meaningful basis to comparison 
shop--a good thing for consumers and for the market.
Medigap first dollar coverage
    In an ideal world there would be a simple answer to the question of 
how to design cost-sharing in Medigap that strikes the right balance 
between ensuring that people who need care get care and discouraging 
people from seeking unnecessary care. Finding that delicate balance 
requires a fair and objective review of our learning on health care 
usage. Based on our experience, we have two serious concerns that we 
raise here: One, plans that do not provide first dollar coverage might 
deter people who elect these plans from getting needed care. Two, plans 
that do not provide first dollar coverage might draw a healthier pool 
of policyholders, which could lead Medigap insurers to raise rates on 
the less healthy pool of policyholders who elected first dollar 
coverage plans. Moreover, plans that do not provide first dollar 
coverage are not likely to attract subscribers. As you know, the two 
high deductible plans currently available have few subscribers. Today, 
many more people sign up for plans that cover their high deductibles 
and high cost sharing than for less expensive plans that do not.
    Regardless of ideology, none of us wants a health care system that 
deters people from getting needed care. At the same time, limited 
public resources should not be diverted to pay for unnecessary care. We 
need to understand clearly where the dividing line is. The tragedy we 
hear at the Medicare Rights Center, day after day, is from our elderly 
clients who report that they go without needed care because they cannot 
afford it. As you well know, prescription drugs are the prime example 
of what we consider to be an inhumane and uncivilized deprivation in 
modern day America. Remember, the Medicare population is a group of 
Americans who have a median income below $24,000 a year. Indeed, 
members of the Committee, our neighbors are going without needed health 
care as we meet today.
    Our client experiences also tell us that Medigap policies are the 
mechanism through which our clients budget for their health care each 
month, enabling them to predict many of the costs they will face. Human 
beings, of course, are not clairvoyant and are hard-pressed to self-
insure for unexpected high cost health care needs. While a high-
deductible Medigap plan may mean a beneficial lower monthly Medigap 
premium, it may also mean a gamble about future health care needs and 
out-of-pocket costs that keep people from getting necessary care.
Reducing first dollar costs
    As this Committee considers ways to offer people with Medicare 
meaningful health care choices, encourage access to needed care and 
discourage unnecessary care, we would urge you to look at offering 
supplemental coverage options directly through Medicare with a co-pay 
and a premium. Adding supplemental coverage options to Medicare would 
allow the millions of people with disabilities under 65 the right to 
purchase coverage, promoting their access to needed care. It could also 
spread risk more broadly and help stabilize supplemental insurance 
premiums. We wonder whether the Congressional Budget Office has ever 
scored this proposal to expand Medicare and strongly recommend that you 
request further study of this option.
Access to Medigap and Prescription Drug Coverage
    To conclude, we strongly urge that before pushing forward with 
changes to Medigap that you ask the GAO and the CBO to study these 
proposed changes and their potential consequences. Add to the current 
Administration proposals serious review of other options, such as a 
supplemental policy directly through Medicare. No one expected that the 
Balanced Budget Act of 1997 would lead to 2.2 million Americans losing 
their HMO coverage and thousands struggling to secure a Medigap policy. 
No one would want to offer a change to Medigap that impeded access to 
needed care. That said, the greatest barrier to needed care right now 
is the lack of a Medicare prescription drug benefit. Prescription drug 
coverage through Medigap has proven to be unworkable. Now is the time 
for Congress to expand Medicare to include prescription drug coverage 
for everyone.
    Thank you.

                                

    Chairman Johnson. Thank you very much, Ms. Weiss. Mr. 
McCrery.
    Mr. McCrery. Thank you, Madam Chair.
    Ms. Weiss, your last statement was that, ``Providing 
prescription drugs through Medigap policies has proven to be 
unworkable,'' I believe is what you said.
    Ms. Weiss. Yes.
    Mr. McCrery. Why do you think that is?
    Ms. Weiss. I would say that I believe that is the case 
because only between 8 and 10 percent of people who have 
Medigap have chosen the Medigap plans that offer prescription 
drug coverage. The fact that they have only a 50-cents-on-the-
dollar coverage and high deductibles means that people 
essentially have to spend over $6,000 to get $3,000 worth of 
coverage. So my sense is that the Medigap plans that do offer 
prescription drug coverage are not a good value. And we have 
seen that indicated by the few number of enrollees who have 
actually signed up for them.
    Mr. McCrery. Dr. Young, do you agree with that analysis?
    Dr. Young. Yes. That is the same that we hear back. The 
Medicare beneficiaries look at that and say, ``This is not a 
good deal for me, and I'll choose one of the other options.''
    Mr. McCrery. And why is the price so high in relation to 
the benefit for those policies?
    Dr. Young. That has to do with the problem of selection, of 
adverse selection. And Medicare's beneficiaries with drug costs 
have a very good idea of what their drug costs are going to be; 
if they are going to be $500 or less, or if they are going to 
be $1,000 or $2,000. So they can go through the arithmetic. And 
if they are going to have high drug costs, then they are likely 
to pick that option, and they will be in that 8 or 9 percent.
    That results, though, in the premiums going up, because 
everybody there has drug costs that are much higher than 
average. You cannot spread the costs across a larger group and 
keep the premiums lower.
    Mr. McCrery. So Mr. Jindal, how do we solve that problem? 
If we cannot provide prescription drugs effectively to the 
Medicare population, to the universe of Medicare beneficiaries, 
through Medigap policies, because of adverse selection, how do 
we solve that problem?
    Mr. Jindal. Well, I also want to add that one of the 
concerns we have with the Medigap policies, in addition to what 
the previous two speakers said and what the Chair has said, is 
the problem being that you have to buy all of these other 
benefits before you get to the prescription drug coverage. It 
is not possible to get the drug coverage unless you buy first-
dollar coverage.
    So I think a couple of principles the Administration is in 
support of is, first, no longer requiring beneficiaries to buy 
first-dollar coverage for other utilization before they get 
prescription drugs. Second, we do believe that, if offered 
through risk-bearing, integrated plans, if you buy drug 
coverage that includes not a capped drug coverage, but also 
includes catastrophic coverage, you will get a better sharing 
of that risk.
    So two changes would be, first, divorcing it from having to 
buy first-dollar coverage and, second, not making it a capped 
benefit, but rather making it a catastrophic benefit in an 
integrated, privately offered, risk-bearing plan, would be a 
way to get more affordable drug coverage to Medicare seniors.
    Mr. McCrery. Bottom line, though, if we are going to have 
effective and affordable prescription drug coverage, do we not 
have to pretty much spread that across the Medicare population?
    Mr. Jindal. Yes.
    Mr. McCrery. Then that brings me to Mr. Stark's question, 
or his statement, that a Federal program would be 20 percent 
less expensive to provide than private programs. That does not 
seem to be the way the administration is going; and I doubt if 
that is the way Dr. Young would want to go. So maybe you would 
like to comment on Mr. Stark's proposal.
    Mr. Jindal. I would be happy to start. I would like to 
follow up that the Administration certainly, in addition to 
supporting the President's call for drug coverage for Medicare 
seniors, also supports intermediate and short-term steps. That 
is not to say we should not do anything. And that is why we are 
proposing the two new plans while we are proposing the 
Pharmacy-Plus waiver program, the discount card, and the low-
income plan as well.
    In terms of the question of CMS administering the Medigap 
option, I would say a couple of things. One, certainly, the 
Administration supports modernizing the fee-for-service cost-
sharing structure, so that we may be able to even reduce the 
demand or need for supplemental coverage.
    For example, we think that adding stop-loss coverage in a 
restructured cost-sharing package can be done in a way that may 
reduce the need to buy wrap-around coverage. Currently, there 
are several gaps. In addition to a lack of prescription drug 
coverage, you also have the lack of unlimited hospital days. 
You have got a cap on the number of hospital days a senior can 
get in any given year. You have increasing co-payments on both 
hospital days and nursing home care. In other words, you do 
have some financial disincentives for those seniors that face 
the highest health care costs. So one thing we are in agreement 
with is the need to re-look at the cost sharing in the 
government-run fee-for-service plan.
    Second, we do have some concerns, however, about asking 
CMS, given all of their other responsibilities, to actually 
manage an additional set of responsibilities. And I am sure Dr. 
Young can also point out the other benefits offered by Medigap 
providers, whether they are discount cards or other services.
    So on one hand, we are very supportive and want to work 
with this Committee and Congress to look at changing the fee-
for-service cost-sharing structure, especially the addition of 
catastrophic and stop-loss coverage. But, on the other hand, we 
do have some concerns about asking CMS to take on those 
additional responsibilities.
    Mr. McCrery. Madam Chair, if Dr. Young could respond?
    Dr. Young. Yes. The figure that has been used, that was in 
the GAO testimony as well, Medicare's administrative cost--3 
percent--is a very misleading figure. Those are the direct 
costs at the Health Care Financing Administration and to 
contractors. It does not include any of the costs of the tax 
system to collect premiums and to collect information.
    Many of Medicare's costs in fact are passed on to its 
insurance carriers, through requirements for beneficiary 
education that the Medicare program does not carry out. So 
there are many things built into the government overhead and 
cost that do not show up in that 3-percent figure.
    In addition, the market does do things that the government 
does not do. Bobby touched on a couple of them, in terms of 
education, in terms of drug discounts, in terms of services. So 
it is apples and oranges.
    There is a third factor in there, and we are not any 
happier about it than Mr. Stark. But that is a 2- or 3-percent 
State premium tax that we have to pay in order to do business 
in every State. And if you can help us out with that, we would 
be grateful.
    Mr. McCrery. Thank you.
    Chairman Johnson. Thank you, Mr. McCrery. Mr. Stark.
    Mr. Stark. Well, I am just going to raise a couple of 
issues here that I cannot quite make jibe, and I do not know if 
it is Mr. Jindal or Dr. Young who can answer them. But in the 
President's budget he talks about that his plans will improve 
by offering a prescription drug benefit to protect against 
catastrophic illness, and at a lower premium cost than the most 
popular Medigap plans today. Those are ``C'' and ``F,'' I 
believe; and those average costs are about 1,100 and 1,200 
bucks. The drug benefit plans run 1,700, so somewhere in there, 
there is 600 bucks for drugs. There may be some travel stuff, 
but I do not think that amounts to a hill of beans.
    What I cannot get to is, unless you are really going to 
deny people a lot of coverage, when you say first dollar, if 
you are really going to say they have got to be a couple of 
thousand bucks out-of-pocket, which I do not think we want to 
do, I think there is evidence--and maybe Mr. Scanlon and Dr. 
Young and Ms. Weiss would agree--that you get as much reduction 
of utilization for a $10 co-pay as you do for a major 20-
percent co-pay; that the minimal dollar amount--and I know that 
Kaiser has found this--is absolutely as effective as a higher-
dollar one in keeping people from carelessly using medical 
services. And I would hope we would keep that in mind. There is 
no sense punishing them. If we can get them to not abuse it for 
10 bucks, let us leave it at that; rather than a higher amount.
    But what I cannot get together here is how you are going to 
provide what, as I read your plan, is basically the same drug 
benefit that is currently in ``J,'' and maybe in ``A'' and 
``I.'' So either you have got to have a phenomenally high 
premium, or you are just wild about how much money you are 
going to save by cutting back first-dollar coverage.
    And it would help if you, in cooperation perhaps with Dr. 
Young's group--because we will not be able to set the price for 
this. This is whatever the insurance company is going to set. 
And if nobody buys it--because they are sure as hell not buying 
the drug benefits today. Why would they buy a policy with no 
first-dollar coverage and no better drug benefit? I cannot make 
that fit.
    And I think that perhaps--and let me just throw out an 
idea, and then I will shut up--the possibility has occurred to 
me that I have no idea what this would cost. But because I do 
not want to fight with the private insurers, because then we 
would not get anything passed, for now, what if we said: Let us 
go back to the good old days of a catastrophic bill, a 
Federally administered catastrophic bill that would be 
universal community rate. Let us say we would pick up 
everything over two or three grand out-of-pocket. That would 
cut the risk, the long-term risk, for Dr. Young's Members 
dramatically. Let them fuss about first-dollar coverage then. 
And to show that we would let the private market help, we would 
let Dr. Young's companies, basically, sell that. The Federal 
government, in effect, would sell reinsurance. So you could 
tack that into your policies. We would underwrite it, as a 
reinsurer, as a Federal reinsurer, at whatever level we could 
afford. And then all of the policies would have some kind of an 
out-of-pocket cap, and it would include drugs.
    And then, even for the people who choose to go without 
insurance--and as Dr. Young and Mr. Scanlon have said, the 
seniors know quickly; they do the arithmetic--then it is a 
question of the actuaries figuring out how to sort out those 
risks and charge a reasonable amount.
    I think we could redesign this system, if the health 
insurers would work with us. And I do not think they are all 
jumping up and down to have that long-term liability, anyway. 
And that might be a different way to get to solving this 
problem. But I just do not think we can just move the pieces 
around on the chess board, because the costs are going to be 
the same, the instincts to purchase are going to be the same, 
the commissions are going to be the same.
    I do not know how we get there from here. Maybe Mr. Jindal 
can tell me what I am missing. There cannot be that big a 
savings in the first-dollar coverage to pay for a major drug 
benefit. I mean, maybe there is, but I do not think Mr. Scanlon 
or I would agree with you. I would love to be convinced 
otherwise, but I do not see that. Can you help me with that?
    Mr. Jindal. Congressman, I thank you for the questions. 
With the Chair's permission, I would like to answer both of 
your questions.
    First, the Administration has provided a couple of 
examples. We are obviously willing to work with you and the 
Members of the Committee on the details. We have provided a 
couple of examples of what Plans ``K'' and ``L'' could look 
like. And the independent actuaries at CMS, at the Department, 
have said that these would cost $500 less per year than current 
Medigap policies that cover drugs. In other words, making them 
comparable to what other Medigap policies are today that do not 
currently cover--
    Mr. Stark. To ``A'' and ``C.'' To bring them down to ``A'' 
and ``C,'' yes.
    Mr. Jindal. That is correct. So you would bring it down in 
that ball park. And so you would be immediately offering a 
premium savings of $500 per year. You would do that. Not only 
would you save beneficiaries money, but also save the Medicare 
Program money, by doing modest cost sharing. We agree with you, 
it would not be a ridiculous amount of cost sharing.
    Mr. Stark. But would that savings not all come out of their 
first-dollar coverage?
    Mr. Jindal. The premium reductions and the government 
savings would come down from the reduction of over-utilization.
    Mr. Stark. And that is out-of-pocket to the beneficiaries, 
then. So I mean, it is pretty much--I mean, there may be some 
actuarial savings, but at the first-dollar level, I would guess 
that the premium reduction or increase is almost linear with 
the deductible for the first-dollar coverage.
    Mr. Jindal. Well, I think we are only talking about a $100 
deductible to generate the $500.
    Mr. Stark. But I am talking about the 20 percent and those. 
But go ahead. I am sorry.
    Mr. Jindal. Well, no, but I think you will see the savings. 
And I would certainly defer to the actuaries and others that 
would want to look at this. I think you will see the savings 
will come through utilization decreases. It would not be a cost 
shift. And I think you can see that by comparing the cost of 
employer-provided supplemental coverage with Medigap first-
dollar provided coverage, if you look at utilization between 
those two populations.
    And I think that Mr. Scanlon referred to the fact that even 
those employees with employer-provided coverage with very 
modest cost sharing and a structure similar to what we are 
describing here have lower utilization than those with first-
dollar coverage.
    And so, certainly, the concept that we are proposing and 
that we want to work with you on is how to drive down the over-
utilization and use those savings to benefit both beneficiaries 
and the Medicare program. And I think you have heard all of the 
witnesses today and you have heard Members on both sides agree 
that that would be a good thing, if we could accomplish that.
    Mr. Stark. What are some of the areas? Where is the highest 
over-utilization? What is the area that is most abused?
    Mr. Jindal. Well, I think, again, if you look at the GAO 
work and the CBO work, what you will find is----
    Mr. Stark. No, no, no, no, no. In Medicare, what is the 
area? What do us ``old farts'' do? Where do I go spend money 
that is the most abusive? Where do I waste the most money for 
Medicare? Is it getting proctoscopic examinations, buying 
medicine for strep throat? I mean, where do you find that us 
seniors abuse the system the most?
    Mr. Jindal. Well, Congressman, certainly, I am not going to 
make that characterization you made in terms of who is----
    Mr. Stark. OK, but where?
    Mr. Jindal. Again, if you look at the CBO and GAO studies, 
and you look at where the utilization is higher for those with 
Medigap, versus those without Medigap----
    Mr. Stark. But stop a minute. You are not hearing the 
question. What do the seniors buy with our taxpayer dollars? 
What is the highest abuse going to visit the doctor, going to 
the emergency room? What are the procedures that are the 
highest, the most abused, over-utilized?
    Mr. Jindal. I mean, I will not be able--I will defer to 
GAO, in terms of picking which single service is the most over-
utilized. But again, if you look at the CBO and GAO studies, 
you see higher utilization across the board, in terms of both--
--
    Mr. Stark. Would Mr. Scanlon know that?
    Mr. Scanlon. I cannot give you a list of procedures 
specifically. I think that one of the things that we do 
ascertain from looking at the work that Dr. Wenberg does, in 
terms of the variation that exists across the country, is that 
all medical care is not necessarily optimal.
    And that is part of this, I think. Because I think it is an 
issue that it is not necessarily a procedure, because with 
procedures often the needs criteria are more clearly defined. 
It can be chronic care for a condition, in which visits every 6 
weeks could be adequate; but when there is no cost-sharing, 
there is no resistance on the part of the beneficiary or the 
provider to come back monthly. So it is something like that 
that may be affected by this kind of a change. That kind of a 
change would be benign.
    Mr. Stark. But could we not also change that by restricting 
the providers in some cases, to say, in this case--if we could 
determine that--that every 2 weeks is too much, but perhaps 
every 4 weeks is correct?
    What I am getting at is that sometimes I think that we 
blame the beneficiaries for things that they may not choose to 
do. And I am sure that most of us do not choose diagnostic 
tests, for instance. Most of them are not any fun. Possibly, a 
visit to the doctor; but often that takes getting on the bus, 
you know. I am not sure that it is entirely the patient. There 
may be some areas.
    Mr. Scanlon. I agree with you, it is not entirely the 
patient. And we are not here to blame the patient. I think, 
though, that the idea that we could manage the program through 
utilization review is not feasible, given that we have got 
about 600 million claims for physician services in the course 
of a year.
    We really need, I think, to enlist both beneficiaries and 
providers to be sensitive to cost. I mean, that is part of why 
cost sharing is in employer-based insurance, why it was 
originally put into Medicare. It is just that Medigap has taken 
away cost sharing from the Medicare Program. And having some 
cost sharing, I think, puts it more on the same basis as the 
way the rest of insurance is designed, and will provide some of 
that sensitivity to cost and will prompt questions about the 
value of services. That is what I think we can hope for at 
best.
    Mr. Stark. Except that for the people in those plans, the 
difference between those--for example, with drugs and without 
drugs--is almost non-existent. The out-of-pocket costs--in 
other words, the Medigap with prescription drug and Medigap 
without prescription drug--the difference in the out-of-pocket 
costs for the beneficiaries is only 30 bucks a year. So that 
part of this first-dollar cost is the $1,000 premium they are 
paying. In other words, they are kind of pre-paying. They are 
funding their own medical savings account.
    And depending on how far up you go, you are saying they are 
already paying $1,000; are you going to make them pay $5,000 
before we clock in? I mean, how much more do you want to kick 
up their out-of-pocket costs? Or do you think if you made them 
pay the $1,000 on a per-doctor visit, they would spend less? 
That is possible. I do not know. Dr. Young?
    Dr. Young. I think this is a very important issue that 
deserves more attention and discussion than we have given it. 
As a physician, what concerns me is the research that has 
shown, yes, increasing out-of-pocket spending does indeed 
reduce utilization of services; but it could be unnecessary or 
necessary services.
    Mr. Stark. Right.
    Dr. Young. So how do you know which one you are doing? And 
that may be a tool that is just a little too blunt, 
particularly for seniors, and frail seniors.
    The other end of the research spectrum is on low-income 
people; and most of Medigap purchasers are low-income. And the 
Center, I think, has good data on that. It is that clearly, 
when you remove the affected insurance and simply look at 
service utilization by income, service utilization increases as 
income increases. And those at the low end report not having a 
regular physician, not getting the care that they need, 
delaying care. And so that very much concerns me, when we look 
at blunt data that says, ``Here is how much money you can 
save.'' That may just be too blunt.
    Mr. Scanlon. I think it should then concern all of the 
employers that are offering the same kinds of policies that we 
are talking about today in terms of restructured Medigap.
    Dr. Young. There are options that can be considered, and I 
think they should be when it is time to do a comprehensive 
reform. An option that looks at payment from a deductible may 
have a different effect than one that looks at copayments. An 
option that looks at copayments through increased cost sharing 
will have huge administrative costs to it. So as the time comes 
to look at a comprehensive reform and a comprehensive set of 
packages, we are very interested in taking you up on your offer 
and discussing these things with you and trying to identify the 
best approach. Our interest is in a product that Medicare 
beneficiaries want to buy.
    Mr. Jindal. And if I could just add one final thing--and I 
know others may have other questions--I do think it is 
important to note that it is possible to decrease over-
utilization without negatively impacting beneficiaries' health. 
And the choice is not either first-dollar coverage, or under-
utilization. I do think there is a middle road. And we would be 
happy to work with the Members of the Committee.
    I know there have been studies looking at self-reported 
health status and others. I think as long as the cost sharing 
is modest and reasonable and there are reasonable protections 
and out-of-pocket exposure, there is a way to, as Bill has 
mentioned, make beneficiaries aware of the cost of additional 
services without, as the Congressman has suggested, giving them 
false incentives to under-utilize care.
    So I do not want to leave the Committee with the impression 
that the choice is either first-dollar coverage and over-
utilization, or under-utilization. We do think there are 
moderate policies that can balance both of those competing 
goals, and do so better than we are doing so today.
    Ms. Weiss. I also just want to reiterate that we would 
again recommend considering moving Medigap into Medicare and 
looking at the first-dollar coverage issue with maybe a modest 
co-pay or a modest premium--with the emphasis on ``modest.'' 
There are multiple benefits to doing this. Again, we could talk 
about spreading risk throughout the entire Medicare population.
    But again, two other key issues, one which I mentioned in 
the testimony: Currently, there are a number of States that do 
not provide Medigap coverage to people who are under 65 with 
disabilities. And the second point is that, depending on where 
you live, that determines how affordable your Medigap coverage 
is. States that have community rating provide the same cost to 
each person who enrolls, no matter what their age or when they 
buy the policy. However, most States have moved toward attained 
age rating. And while it may be a cheaper policy at the time 
you buy it when you are 65, as you age the costs go up, and it 
becomes more unaffordable at the very time when people have 
less money to spend. So again, I would reiterate looking at the 
option of moving it into Medicare.
    Mr. Stark. The Chair is going to indulge me with one more 
question. Dr. Young, think about this. You cannot answer it 
here. But if we were to follow Ms. Weiss' idea, or even my idea 
of Federalizing Medigap, in effect, or some of it, what 
portions of the risk exposure--it is my understanding there are 
only five or six underwriters of Medigap left, anyway. That is 
close; isn't it?
    Dr. Young. Now you are talking about the overall risk 
exposure, in terms of services?
    Mr. Stark. No, I am talking about--there are only four or 
five insurance companies left writing Medigap, as far as I 
know. Maybe there are a few more.
    Dr. Young. Oh, there are well over a 100 different 
insurance companies that sell this product.
    Mr. Stark. There are?
    Dr. Young. Yes.
    Mr. Stark. OK.
    Dr. Young. A large number of them.
    Mr. Stark. The question is, if we were going to pick and 
choose, if we were going to Federalize a portion of the risk 
that they are now insuring through this variety of Medigap 
plans, what are the most profitable segments that your guys 
would like to keep, and what would you like to get rid of? In 
other words, I am sure the long-term liability you would love 
to get rid of, right?
    Dr. Young. Well, there are a lot of things we would like to 
get rid of.
    Mr. Stark. No, I am serious. I am serious. I mean, that is 
the risky part.
    Dr. Young. Yes. I mean, the bottom line is what I said 
earlier. We would like to keep the piece the beneficiaries 
love. And I must say that one thing that is the highest on 
their list is they like the certainty of knowing what their 
out-of-pocket spending is going to be.
    My mother, who could easily self-insure--and we have had 
this conversation many times, and I have concluded she is 
right--she loves her Medigap. Because she knows what her 
expense is going to be every single month.
    And we forget in these conversations that Medigap is 
insurance. When the year begins, she does not know if she is 
going to be hospitalized twice, or once, or no times. She does 
not know if something is going to come up that is going to 
require 10 or 20 doctor visits. So she is sharing the risk of 
that unknown as the year moves forward. So she has the 
certainty; she has the peace of mind. And she has absolutely 
convinced me this is a good deal for her.
    Mr. Stark. Well, I think that it is a good deal for you 
guys, too. And you are getting $1,000 or $1,100 a year, on 
average, $1,158, for, on average, 1,369 bucks out. So you are 
clearing a couple of hundred bucks per policy, which is about 
what you ought to be making. It is that simple.
    Dr. Young. Well, I mean, we are not clearing that on the 
profit side. My Members would love to.
    Mr. Stark. No, but you are on your loss ratio side, easily.
    Dr. Young. Oh, in terms of the overall administrative 
costs, including everything.
    Mr. Stark. Yes. But that is your word. I mean, that goes 
all to your Membership fees. But my point is that you are 
trading dollars with your mother. You are saying, ``Mom, 
instead of putting the $2,000 in the savings and loan, and 
drawing on that if you need it, you pay so many bucks a month 
for your Medigap policy, and it is going to work out.'' And on 
average--which is what you depend on--it does.
    Now, I am just saying you ought to take the front end of 
that and take the $2,000 chunk, and let us take the high costs 
and the outliers. And we should figure out, because there is no 
sense fighting with your guys--There is a lot of 
administration, a lot of fees, a lot of claims for you to pay. 
Maybe you would rather take the high stuff. I do not know.
    Dr. Young. Well, the problem with that approach is, as you 
get a product you are selling that is less and less and less in 
value--that is, has less benefits in it--your fixed costs 
remain the same. So the share of the fixed costs grows. If you 
can spread those fixed costs across a larger benefit package, 
then everybody is better off because of that.
    Chairman Johnson. Thank you.
    Mr. Stark. Thank you, Madam Chairman.
    Chairman Johnson. I would like to pursue the topics that my 
colleagues initiated. I let them go first because I know that 
it is late and the last date, and they have other obligations, 
and I know Mr. Stark is not feeling very well. But I do want to 
pursue a couple of things.
    First of all, the RAND health experiment study that showed 
that individuals were just as likely to limit the use of highly 
effective care as less-effective care, also indicated that 
there was no overall effect on health for the average person. 
So I am not aware of any studies that indicate that first-
dollar coverage erodes health.
    Dr. Young. That is a very good point. The problem with that 
is the kind of research that you need to do, if you were to 
prove that. Because a large amount of medicine, every-day 
medicine, does not have an effect on mortality or a measurable 
outcome. It has an effect on activities of daily living; it has 
an effect on peace of mind; it reduces pain.
    Chairman Johnson. But for example, Dr. Young, though, would 
it not be quite easy to look at Medicare participants who 
cannot afford Medigap? Those are the ones, frankly, I am most 
concerned about. The other group are Medicare recipients who 
can afford Medigap. Because you have two groups with exactly 
the same coverage; one of whom has first-dollar 
responsibilities, and one of whom does not. I mean, are we 
aware of any difference in health outcomes in those two groups?
    Dr. Young. As far as I know--and Bill can comment on this--
we are not aware of it on either end of the spectrum, because 
it is such a difficult issue to measure. But we will see if he 
has some insights.
    Mr. Scanlon. No, I am afraid I do not. I do not think we 
have good health status measures. I agree that we do not have 
comprehensive measures, and it is difficult to deal with. But 
at the same time, I think that there are discretionary services 
that people, when they are sensitive to costs, will forego. We 
have got to design cost sharing in ways that try to avoid 
people foregoing important services.
    Chairman Johnson. I appreciate that.
    Mr. Scanlon. Like hospitalization.
    Chairman Johnson. I appreciate that, and I am not proposing 
that the answer is necessarily that we have no exceptions to 
the exposure of deductible. But I think it is important to 
remember that we have no evidence showing that seniors who have 
Medicare and no other coverage are in worse health.
    Now, we do know we have to exclude prescription drugs 
because, of course, that is not part of Medicare. And that 
seniors who have Medigap coverage, without prescription drugs, 
have better health outcomes because they are not exposed to the 
deductible. See, there really is no evidence supporting this.
    I understand that that means the reverse is not necessarily 
true. But the one piece of evidence that we clearly do have is 
that the people who have first-dollar responsibility use fewer 
services. Though, we do not know that that necessarily results 
in poorer health outcomes. Now, logic would dictate that we 
have an interest in those people using preventive services.
    And so we could use coverage as an incentive. We have never 
done that for any groups; where services are singled out as 
having no copayment, and therefore in a sense focusing on them 
and providing some kind of incentive to use them. And so, 
personally, I think that is philosophically a worthy thing to 
do.
    I did want to get clearly on the board that one of the 
reasons the Committee is compelled to look at prohibiting 80 
percent of first-dollar coverage, or 100 percent of first-
dollar coverage, is because there is increased evidence that 
these people use more services, pushing premiums up for 
existing seniors and pushing taxpayer costs up. This money 
could be better utilized.
    Now, I want to ask two sort of basic questions about the 
Administration's proposal. Are you proposing these two plans, 
and eliminating all other Medigap policies? Or are you 
proposing these two as additional Medigap policies?
    Mr. Jindal. I think that we absolutely are proposing these 
as additions to existing policies. So we are not trying to take 
away anything from seniors, or deprive them of options they 
have today.
    I also want to absolutely agree with your earlier remarks. 
When you look at not only the RAND study, but other self-
reported studies, you are right that seniors do not report a 
decrease in self-reported health status, as well. And I think 
that, from one of the previous questions, it is true that when 
you look at employer-provided coverage, either retiree or pre-
retiree coverage, outside of this market, I am not aware of 
another market where you have got first-dollar coverage without 
some kind of coordination of care, without some kind of 
examination of utilization.
    Clearly, what this Congress, what you have done through 
creating additional options for seniors, and in private plans, 
is you have allowed them to buy down--meaning Medicare+Choice 
and other plans--you have allowed them to buy down their cost 
sharing, reduce their cost sharing, but to do so in an 
integrated plan that also coordinates their overall care.
    Chairman Johnson. Now, if these are options, why would you 
not be concerned about adverse selection? If I were a senior, 
for just 50 percent of Medicare cost sharing, that is 50 
percent of the Part B deductible, really--no, you are not going 
to cover the Part B deductible.
    Mr. Jindal. That is correct.
    Chairman Johnson. But then, your copayments for doctors' 
visits and things like that would be 10 percent, instead of 20 
percent, right? You know, for really a rather modest first-
dollar responsibility, because you are proposing that you would 
cover the co-insurance in long-term hospital stays.
    Mr. Jindal. That is correct.
    Chairman Johnson. Which has always been a big problem. And 
also, in nursing home? The variations in nursing home 
deductibles?
    Mr. Jindal. That is correct.
    Chairman Johnson. So really, for the $100 deductible in 
Part B, and 50 percent less exposure in the co-insurance area, 
you are going to provide a $4,000 limit on out-of-pocket 
expenses, and 50 percent of all drug costs up to $6,000. Now, 
that seems to be an awful lot to be paying for, with just this 
change in the deductible. And you say this will be a lower 
premium than current Medigap policies.
    Now, what do you think the premium is going to be? And what 
would be the difference between the premium for, say, your two 
proposals?
    Mr. Jindal. Well, first of all, we think the premium will 
be $500 or less than what it costs currently for Plans ``H'' 
and ``J.'' So it would be competitive with what seniors 
currently pay for Medigap without drug coverage. So you are 
absolutely right. We look at this as a great deal for seniors, 
but also a good deal for the Medicare program, as well.
    Seniors will be able to reduce their out-of-pocket spending 
on premiums by $500. The Medicare Program will save well over a 
billion dollars. Plus, you have over 700,000 seniors who do not 
have drug coverage today, who would get drug coverage through 
these options. So we absolutely agree with you.
    Chairman Johnson. But now, just a little bit slower. You 
say this would be $500 less. And yet, instead of providing 50 
percent of drug costs, for a maximum of up to $3,000, this 
would go up to $6,000. So you are getting, you know, $1,500 
more in drug costs, and the $5,000 limit on out-of-pocket 
expenditures under the rest of the plan. And you can do that 
for $500 less, just because of the copayment changes?
    Mr. Jindal. That is right. Well, and the drug benefit is 
actually identical to what is contained in Plans ``H'' and 
``J'' now. And that helps to address part of your concerns 
about adverse selection. By not varying the drug benefit, but 
by using the changes in over-utilization to help pay for that, 
that helps to make the plan more affordable, and increase the 
number of seniors with drug coverage.
    Now, we do not look at this as a comprehensive solution. We 
look at this as a first step that we would like to work with 
you and other Members to help increase the numbers with drug 
coverage and reduce the cost for seniors.
    Chairman Johnson. And what would be the premium on the one 
that covers 75 percent of cost sharing, and a $2,000 limit on 
out-of-pocket expenditures, but only covers 50 percent of 
drugs, up to $2,500?
    Mr. Jindal. And again, it would be roughly $500 less than 
Plan ``H.''
    Chairman Johnson. Both of them have roughly the same 
premium?
    Mr. Jindal. That's right--Well, no, they are $500 versus 
their counterparts. So Plan ``K'' would be roughly $500 less 
than Plan ``J,'' Plan ``L'' would be roughly $500 less than 
Plan ``H,'' in terms of what seniors can pay today. And 
obviously, as you heard, there is a variation across States and 
across plans, but it would be roughly $500 less than their 
counterparts today.
    Chairman Johnson. That is very interesting. Do you have any 
comment on that, Mr. Scanlon?
    Mr. Scanlon. I cannot comment in terms of the amounts of 
the premiums. We did not have the details before today. And 
also, we need to think about talking with actuaries about this.
    I do think the issue that you raise of selection is a very 
important one here. One of the things that is true about 
current Medigap plans is that beneficiaries have an open 
enrollment period in the first 6 months in which they are 
Medicare eligible. And then there are certain enrollment rights 
when people leave Medicare+Choice plans or when their employer 
coverage is dropped. What the terms would be, in terms of 
beneficiaries being able to sign up for new plans, would be 
critical in affecting selection.
    I would surmise that perhaps some of the low use of Medigap 
drug coverage today is the fact that most seniors became 65 
when drugs were not such an important issue. I mean, if you 
think about it, our focus on drugs as both expensive and as 
having incredible therapeutic value has been a relatively 
recent phenomenon. People that are turning 65 today may have a 
very different perspective on wanting to buy drug coverage than 
those that turned 65 in the early nineties or in the eighties.
    Chairman Johnson. Thank you. I was not aware that Medigap 
was quite so rigid as I heard from your description. You can 
change Medigap plans from one to another now, although 
sometimes you will have to pay more because you get medically 
underwritten, right?
    Mr. Scanlon. That is correct. I mean, generally, plans are 
available without underwriting when there is no drug coverage 
involved. But when drug coverage is involved, it is very hard 
to find a plan without underwriting.
    Chairman Johnson. And Mr. Jindal, would there be 
underwriting for eligibility for Plan ``K'' and Plan ``L''?
    Mr. Jindal. The protections we envision will be those 
similar to what exists today, in terms of the 6-month 
enrollment. So that seniors would have a chance to sign up 6 
months after they become eligible for the program, when they 
turn 65.
    And given those assumptions, that is the basis on which the 
actuaries assumed you would have one and a half million 
beneficiaries choose these plans and, as a conservative 
estimate, you would save the program over a billion dollars, 
but you would also save beneficiaries $500 a year in premiums. 
So again, that is why we described it as a ``win-win'' for the 
program and for beneficiaries.
    Chairman Johnson. And would you envision opening Plan ``K'' 
and Plan ``L'' only to new retirees? Or would there be a one-
time opportunity for all Medigap participants to change into 
those plans?
    Mr. Jindal. I think we could certainly--I think we would be 
open to that one-time opportunity for existing Medicare 
beneficiaries, as well; not just those turning 65.
    Chairman Johnson. Can you also look at, as you estimate--
and this is all of you, because I am sure all of you in your 
own bailiwicks will be looking at this. But I think we ought to 
begin looking at opening it every 5 years. You know, the 
rigidity of the plans does not seem to be in the interests of 
seniors, and not necessarily in the interests of government.
    Now, that would be particularly true if we also eliminated 
the absolute first-dollar coverage of all of the Medigap plans. 
Anyone who can afford to buy a Medigap plan can actually afford 
some level of first-dollar responsibility. And so, if there 
were some first-dollar responsibility across the board, you 
might then be able to open these bigger plans more frequently 
that have more catastrophic coverage aspects to them, both in 
the catastrophic coverage for Medicare and in the higher drug 
assistance.
    Dr. Young. The problem that you will run into, though, very 
quickly, if you opened it up, let's say, every 5 years to 
anybody who wanted it, is that the healthy people at age 65 
would say, ``I am going to wait.''
    Chairman Johnson. I appreciate that. Yes, I appreciate that 
problem. But it depends on how expensive they are. When you say 
they are $500 less than the current plans, those are the most 
expensive current plans. So that is a problem.
    Dr. Young. Yes. And then that just drives up the premiums 
for everybody else, when the people do select like that.
    Chairman Johnson. Now, in terms of----
    Mr. Cardin. Would the Chairman yield on that point?
    Chairman Johnson. Yes.
    Mr. Cardin. Just on that point.
    Chairman Johnson. Let me welcome Ben Cardin. He is not on 
the Subcommittee, but he often joins us. It is nice to have you 
here.
    Mr. Cardin. Thank you. Thank you, Madam Chair.
    What I do not understand is, if there has been continuous 
coverage, why do we then require an individual who wants to 
join a Medigap plan that has prescription drug coverage to be 
subjected to medical underwriting? For example, if a person has 
been insured by an HMO, and that HMO pulls out of the market--
which has happened in my State--why should that individual not 
be able to join one of the Medigap plans at that time, without 
the concern of medical underwriting?
    Dr. Young. They are. Under current law, they are allowed 
to. There is a special election period when an HMO goes out of 
business and leaves the market that they are allowed to, under 
current law.
    Mr. Cardin. For how long?
    Dr. Young. What is the time?
    Mr. Cardin. Yes.
    Dr. Young. The window that they have that they can make 
that election?
    Chairman Johnson. I believe it is 2 months.
    Dr. Young. Yes, it is 63 days.
    Chairman Johnson. Yes.
    Mr. Cardin. Now, that also applies to the prescription drug 
plans?
    Dr. Young. No. No, it only applies to the basic Medigap.
    Mr. Cardin. Why does it not apply? My question dealt with 
prescription drug plans.
    Dr. Young. OK, now I understand your question.
    Mr. Cardin. My question is, why does that not apply to the 
prescription drug plans?
    Dr. Young. Yes. And again, because of, I think, the concern 
of the costs and the risks.
    Mr. Cardin. I guess I do not understand that, Dr. Young. If 
the person had continuous coverage, why would you be concerned 
about adverse risk selection? The person is just going from one 
plan to another. This is the same situation we do for private 
insurance, basically.
    Dr. Young. It is if people make the choice to move for that 
very purpose. What we have seen, for example, in the Medicare 
Choice program is that people have come into Plan A with a 
$1,000 benefit; used up their drugs; left; gone to another one; 
and received drugs again. So beneficiaries will do those kinds 
of things.
    Mr. Cardin. Well, no, the scenario I am giving you is a 
person who is in an HMO, a senior who is in an HMO, expected to 
stay in that HMO. The HMO has left the market. The HMO had 
prescription drug coverage. The individual, if the individual 
comes from Maryland, has no HMO that that person could enter 
into any longer and get prescription drug coverage. The senior 
made a decision at 65 to go into the Medicare+Choice HMO to 
have prescription drug coverage and forego the opportunity to 
get a Medigap plan with prescription drug coverage. I guess I 
do not understand the logic as to why we would want to restrict 
a senior----
    Chairman Johnson. If the gentleman will yield----
    Mr. Cardin. Who has had continuous coverage.
    Chairman Johnson. If the gentleman will yield, I think the 
point he is making is really very well taken. If your plan 
leaves the market, why can you not buy a comparable plan? Now, 
if you had not been paying for one with prescription drugs, I 
can see the problem. But if you have been paying a higher 
premium for prescription drugs, why could there not be that 
continuity, so you would have access to one with prescription 
drugs?
    If you were in an Medicare+Choice plan that did not have 
prescription drugs, then your only choices would be other plans 
that did not have prescription drugs. But I find it hard to 
believe that we cannot structure that kind of arrangement.
    That does not solve the other problem that we are having, 
which is when Medicare+Choice plans do not leave the market, 
but change their benefits so dramatically that people are not 
getting the best value for their dollar, and you decide to move 
into another Medigap plan. There are some circumstances in 
which you can do that, but I do think we need to clarify those 
situations.
    Dr. Young. I think your points are well taken. And it is 
important to remember, as Mr. Scanlon told us a bit ago, that 
the rules and the policies that are currently in place for 
Medigap came about in 1990 or 1992 when they were implemented. 
The world has changed dramatically since that time. The Medigap 
structure, in terms of adding a couple of new benefits, has 
changed dramatically since that time.
    And as you consider Medicare reform, as I said in my 
testimony, that will be the time to look at all of these 
issues, revisit them all, and see what are the best policies 
that work for the beneficiaries. So we are dealing today in a 
world and a set of policies that are now 12 years old.
    Chairman Johnson. Well, I do appreciate the testimony of 
the panel. And I appreciate, Ms. Weiss, your comment that 
seniors are adverse to change, and need security. That is why I 
was so interested in whether Mr. Jindal's proposals were as a 
substitute for all of the existing Medigap proposals, or simply 
an addition.
    And actually, let me see if my colleague, Mr. Cardin, has 
any further questions.
    It is very interesting how the literature has come 
together--and I do not want this point missed--to indicate that 
first-dollar responsibility is responsible. And I think we do 
need to take that into account, especially now that we have 
some very, very powerful information as to how that money could 
be reused to expand benefits.
    So I thank you for the thinking that you have done on this, 
Mr. Jindal. And I ask all of you now to go back and run numbers 
on his ideas, and run numbers on some of the other ideas that 
have come up, like holding harmless preventive health care, 
which the administration has talked about but which is not in 
this particular plan. Because I think we need to see what are 
the outlines of the most progressive plans that are still 
different from the Medicare Choice option, which will have a 
better ability to provide product, disease management, case 
management of very ill people, and some other things that also 
are important for us to better understand.
    Thank you very much for your attendance this afternoon. I 
appreciate your input, and look forward to working with you. 
Thank you.
    Mr. Jindal. Thank you, Madam Chairman.
    Mr. Scanlon. Thank you.
    Dr. Young. Thank you.
    [Whereupon, at 3:43 p.m., the hearing was adjourned.]
    [Questions submitted from Mr. Shaw to Mr. Jindal, and his 
responses follow:]

                       U.S. Department of Health and Human Services
                                               Washington, DC 20201
    Question 1:

    The Congressional Budget Office (C.B.O.) indicated that elimination 
of first-dollar coverage would save approximately $1 billion but did 
not consider the impact of such a policy change on states that mandate 
first-dollar coverage. Would you be willing to work with Congress and 
the C.B.O. in order to quantify the impact on states which have this 
mandate?
    Answer:

    Thank you for giving me the opportunity to clear up any confusion 
surrounding our Medigap proposals. The Administration is proposing to 
increase the choices available to Medicare beneficiaries and would not 
eliminate any existing policies. Specifically, we propose immediate 
action to add two new Medigap policies to the array of choices 
available to seniors to purchase Medicare supplemental insurance. We 
have labeled these new policies ``K'' and ``L'' because they would be 
offered in addition to current standardized policies labeled ``A'' 
through ``J.'' These new policies would combine limited cost-sharing 
with stop-loss protection for Medicare covered services and a 
prescription drug benefit. Again, they would not replace existing 
Medigap policies but rather provide additional options for seniors.
    Currently, seniors can choose between any of the ten standardized 
policies as well as two high-deductible options. It is true that 
virtually all states require new Medigap policies to conform to these 
standards, and that most of the current policies--particularly the most 
popular ones--include first-dollar coverage. We believe it would not be 
difficult to add these two new options, however, in the same way that 
the Balanced Budget Act added the high-deductible options, and want to 
work with Congress and the state insurance commissioners to make this a 
reality. This would also give seniors a choice that falls between 
getting first-dollar coverage for hospital costs and doctor visits--but 
with drug coverage available only as an expensive add-on--and having to 
pay all costs below the high-deductible level. While seniors with any 
of these existing Medigap policies would have a one-time opportunity to 
switch to one of the new policies, no beneficiary who was happy with 
their current policy would be required to switch.
    As for the estimate of savings prepared by the Congressional Budget 
Office, our understanding is that their analysis of the President's 
budget proposals assumed there would be new Medigap policies--ones that 
would not provide first-dollar coverage--and did not assume all 
existing first-dollar coverage would be eliminated. Apparently they 
also assumed a benefit design for these new policies that is different 
from the one described in my testimony. Nevertheless it is important to 
point out that the administration also projected 10-year savings of 
over $1 billion just by offering these two new options.
    Question 2:

    American Viewpoint conducted a poll and listening groups on behalf 
of Blue Cross Blue Shield Association asking seniors about their 
satisfaction with their Medigap policy. CMS also has similar data 
showing an overwhelming number of Medigap policy holders (between 80% 
to 90% based on various estimates) are ``very satisfied'' with their 
Medigap policy. In the Administration's proposal to eliminate first-
dollar coverage, have you considered incorporating a transition period 
in order to gradually phase out this feature of Medigap policies?
    Answer:

    Again I want to emphasize that the administration is proposing to 
expand choices available to seniors, not to limit them. In designing 
this proposal we were very much aware of the data you cite and we know 
that many beneficiaries are satisfied with their current supplemental 
coverage and do not want to change. Others may prefer to purchase 
policies that include limited cost sharing but have lower premiums and 
include prescription drug coverage. The new policies proposed by the 
administration would give them this chance. We estimate that as many as 
1.5 million beneficiaries would welcome such an opportunity--and that 
nearly half of them (about 700,000) would be beneficiaries who do not 
have drug coverage now. Moreover, we can achieve this significant 
increase in drug coverage among seniors right away, not several years 
down the road, while saving money for beneficiaries and the Medicare 
Program. It is interesting to note that the same poll you cite found 
that about one-third of Medigap policy-holders would favor a proposal 
that required Medigap plans to have a modest deductible and some 
payments for doctor visits and hospital stays--even without the offer 
of drug coverage. Thus, our proposal--which would offer such coverage 
but not require it--might attract more enrollees than we project.
    Question 3:

    Have you considered implementing preemptive initiatives to minimize 
disruption or confusion that the administration proposal might cause 
for Medigap policy holders in Florida?
    Answer:

    I wish to emphasize that our proposal does not entail disruption of 
the current Medigap market. Medigap policy holders should not 
experience any disruption because of the availability of new 
supplemental policy options. Since the OBRA 1990 Medigap reforms 
standardized Medigap benefit designs, the options offered to 
beneficiaries have hardly changed while medical practice has evolved 
and policy premiums have continued to rise. We believe that many 
beneficiaries will welcome the chance to purchase more affordable 
supplemental policies with limited cost sharing, protection against 
high out of pocket costs, and prescription drug coverage. On the other 
hand, seniors who are happy with their current Medigap policies will be 
able to keep them as long as they like. The Administration is committed 
to increasing beneficiary choice and keeping seniors fully informed 
about all of the choices available to them, including the availability 
of local Medicare+Choice plans as well as Medicare supplemental 
policies.

                                

    [A submission for the record follows:]
     Statement of the National Association of Health Underwriters, 
                          Arlington, Virginia
    The National Association of Health Underwriters (NAHU) is an 
organization of over 17,000 insurance professionals specializing in the 
sale and service of health insurance and related products. Many of our 
Members who specialize in the senior market regularly counsel and work 
with Medicare beneficiaries on Medicare, Medigap, and Medicare+Choice 
options as well as other types of products. We are pleased to offer 
comments and suggestions regarding the current options and enrollment 
procedures for supplemental health insurance coverage for Medicare 
beneficiaries.
    NAHU believes that there are a number of inherent problems within 
the Medicare program that can only be addressed through comprehensive 
Medicare reform. The current Medicare programs A and B present an 
antiquated approach to the financing of health care reminiscent 1960, 
when the greatest fear for most seniors was an extended hospital stay. 
Now, with many services provided on an outpatient basis and the 
availability of stronger and more effective prescription drugs, many 
beneficiaries are able to avoid hospitalization. Due to the advances in 
medical treatments, the level of coverage provided under traditional 
Medicare is inadequate protection for most seniors. The best solution 
to the problem would be to combine Parts A and B into one comprehensive 
program, with a mid-range combined deductible and adequate protection 
against catastrophic risk, including the cost of prescription drugs. 
This would require Medicare supplemental coverage as we know it to 
change dramatically to conform to the new comprehensive form of 
Medicare.
    Given the current political climate, however, it appears that it 
may be necessary to achieve Medicare reform on an incremental basis. If 
we presume that the basic Medicare program is not going to change 
dramatically in the immediate future, the first task will be to make 
sure that consumers have a variety of choices to allow them to select 
the type of plan most suitable for their personal situation. The first 
step will be to ensure that Medicare+Choice plans and Medicare 
supplement providers have incentives to participate in health plans for 
Medicare beneficiaries. It is essential that the current regulatory 
requirements for Medicare+Choice plans be eased and that they be 
compensated fairly.
    Although today's hearing concerns Medigap coverage, the current 
instability in the Medicare+Choice program obviously has a significant 
impact on increasing demand for Medigap coverage on a guaranteed issue 
basis. This increased demand may significantly alter both the 
availability and the cost of Medigap policies. Action by Congress to 
address this urgent situation will only have a positive impact on 
beneficiaries purchasing Medigap policies.
    Our Members report the following regarding market experience and 
beneficiary preferences concerning Medigap policies:
       The most popular benefit is coverage of the Part A 
deductible. Coverage of the Part B deductible is sometimes purchased, 
but often because some other benefit in the plan is desired.
       The skilled nursing benefit isn't used often because of 
the difficulty in meeting the requirements for skilled care due to the 
mandatory 3-day hospital requirement, and because most care quickly 
falls into a custodial category not covered by Medicare.
       Coverage of Part B excess charges is becoming more and 
more important, especially in rural areas where physicians may not feel 
compelled to accept Medicare assignment. In the absence of any stop-
loss provision being added to the basic Medicare program, coverage of 
these excess charges should remain available.
       The most popular plans sold by our members are C, F, H 
and I. Although some employers offer this benefit plan for their 
retirees, very few people want to pay the premium associated with plan 
J.
       The benefits beneficiaries request most often, that are 
not currently covered by Medigap, are for coverage of dental care, 
vision services, hearing aids, and of course, prescription drugs.
BENEFICIARY REACTION TO MEDICARE

    Based on what Medicare beneficiaries tell our Members, the most 
significant problem facing them today is the cost of health care. Many 
Americans approaching retirement age believe that when they become 
eligible for Medicare, all of their health care needs should and will 
be taken care of. Their first step into the Medicare maze comes when 
they discover that they must purchase Part B to cover outpatient and 
other physician care. Many of these beneficiaries believe that Part B 
is a supplement, especially since the Medicare supplements are alpha 
labeled, and they don't understand that they will still have 
significant financial exposure for the cost of their medical care.
    Often beneficiaries first become aware of the gaps in coverage 
after they have passed open enrollment for Medigap. Unfortunately, by 
that time some have developed health problems, limiting or eliminating 
their choices for supplemental coverage. Having been participants in 
low co-pay drug cards as employees for many years, they are amazed to 
find out how much coverage for prescription drugs will cost them, if it 
is available at all, and many of them seek supplemental coverage for 
prescription drugs at this time.
    They are even more amazed to learn the extent of the other medical 
services not covered under the traditional Medicare program. Many of 
these same individuals who may have sought supplemental coverage in 
order to secure insurance for prescription drugs end up buying plan C 
or F (which doesn't cover outpatient prescription drugs) primarily to 
cover hospital and physician charges not covered by the Medicare 
program. Since the benefit under a Medigap policy that includes limited 
coverage for prescription drugs is often equal to or less than the 
extra premium charged, many beneficiaries choose not to purchase 
prescription drug coverage. Many of these Medicare beneficiaries have 
low incomes limited to little beyond their Social Security benefit, but 
for a variety of reasons they may not be eligible for Medicaid or other 
low-income programs. Additionally, the Medicare+Choice plans, which 
they might have been able to afford, may no longer be available in 
their area.
RECOMMENDATIONS

    So how could Medigap be structured to make it more meaningful as 
well as more affordable? Again, in the absence of basic in-depth 
changes to the Medicare program, our first recommendation would be that 
no Medigap plan subsidize the Part B deductible. There are numerous 
statistics that show that individuals with Medigap coverage utilize 
medical services at a significantly higher rate than Medicare 
beneficiaries without supplemental coverage. Their utilization rate is 
also higher than that of retirees with supplemental coverage through 
their former employers. We believe the reason for this is that there is 
typically some cost sharing for beneficiaries covered under employer 
plans, and that plan utilization can be safely reduced if there is some 
financial incentive, however small, that causes a person to think 
before seeking medical care for even the most minor illnesses.
    In terms of prescription drug coverage, we are very skeptical of 
any sort of mandate on Medigap plans to provide drug coverage. 
Insurance carriers report that plan utilization is significantly higher 
on Medigap plans H, I and J, and, based on their experience, they have 
consistently maintained that drug-only policies or mandatory drug 
coverage on all policies is simply not an insurable risk. Although 
pharmacy benefit managers have expressed interest in being providers in 
a Medicare prescription drug program, they have not indicated a desire 
to take on all of the risk for the program.
    While it may seem an easy and simple solution to the problem of 
providing a drug benefit for seniors, in the absence of overall 
Medicare reform, we see no way to magically produce a drug benefit for 
seniors by requiring that it be offered by Medigap carriers. If it is 
offered as a mandate on all plans, the cost of coverage will increase 
beyond what is affordable for many seniors. If it is offered 
voluntarily, the plans with drug coverage will be selected by those 
that need them most, while others will continue on as they are now. 
This will simply exacerbate the already serious problem of the cost of 
coverage by increasing anti-selection causing carriers to leave the 
Medigap market, leaving even fewer choices for seniors than they have 
today.
    On a positive note, some insurance carriers, as well as some of our 
member agents, routinely provide Medicare beneficiaries with a 
prescription drug discount card, often at no cost to the beneficiary. 
Some Blue Cross organizations have begun to extend the discounts they 
have negotiated through the pharmacy benefit managers, with whom they 
contract for their under-65 insureds, to their Medicare Supplement 
policyholders. This allows policyholders to purchase their outpatient 
prescription drugs at significantly discounted rates, as much as 15 to 
30%, even though outpatient drugs are not specifically covered by their 
Medigap policy. This provides no risk for the insurance carrier, but is 
an excellent way for beneficiaries to reduce their cost by using their 
numbers to negotiate discounts. For this reason, we're extremely 
pleased with the Administration's proposal for a prescription drug 
discount program for Medicare beneficiaries. We believe the discounts 
that could be provided by these programs will be greater than the 
Administration's estimates, based on the experience of employer plans 
in the under-65 market, and that beneficiaries would greatly value the 
assistance the discounts would provide. As an interim solution in the 
absence of overall Medicare reform, the discounts will bring a valuable 
price break to Medicare beneficiaries at all income levels.
    NAHU also recommends that additional study be given to the very 
complicated coordination between COBRA and Medicare, and between 
individual health plans and Medicare. It is very difficult for 
beneficiaries, agents and employers to navigate through the landmines 
associated with these benefits. Many beneficiaries discover too late 
that they should have made different decisions when applying for Part B 
after they prematurely trigger Medigap open enrollment rights, or when 
they are forced to go without Part B for an extended period of time due 
to late enrollment time penalties.
    Many others retain individual health insurance policies for years 
because they believe the policy will serve as a Medicare supplement, 
only to find that their individual policy will actually pay little 
beyond what Medicare pays due to language on guaranteed renewability 
found in HIPAA. This is not the fault of the carriers, agents or 
employers but rather the complexity of several overlapping Federal laws 
that don't coordinate adequately or provide for adequate notice to 
insureds of their rights and responsibilities.
    Disabled Medicare beneficiaries need better access to Medigap 
coverage. Due to cost considerations, we are not suggesting that 
disabled beneficiaries have the same purchase rights and plans as those 
age 65, since doing so may mean increases to Medicare beneficiaries' 
already escalating Medicare supplement premiums. We do believe that 
creative options should be explored for extending coverage that won't 
increase costs for other beneficiaries, such as offering coverage for 
disabled beneficiaries through state high-risk pools.
    Currently eight states allow disabled beneficiaries to purchase 
coverage through high-risk pools. This allows these less healthy 
individuals to be pooled with other individuals in the same category, 
provides a place to purchase supplemental coverage, and keeps the costs 
down in the regular Medigap pool. We've included a chart for members of 
the committee illustrating the type of supplemental coverage currently 
available through high-risk pools.
    Medigap policies are highly valued by Medigap beneficiaries and 
provide a great sense of security for millions of Medicare 
beneficiaries. Although changes need to be made to Medigap coverage, it 
may be difficult to implement broad reform without knowledge of the end 
result of reforms in the Medicare program itself, and any changes 
undertaken should be done with careful consideration of any impact they 
may have on current market availability.
    For additional information, contact Janet Trautwein at 
[email protected] or (703) 276-3806.
                               __________

            HIGH-RISK POOLS THAT INCLUDE MEDICARE SUPPLEMENT
------------------------------------------------------------------------
                                             If No
          Is Medicare    Standardized     Standardized         Are
  State     Disabled    Plans Offered?   Plans, What Is    Prescription
            Covered?                        Offered?      Drugs Covered?
------------------------------------------------------------------------
Alaska    Yes          Plans A & I.     ...............  Yes
                        Medicare
                        ``carve-out''
                        offered to
                        those under
                        age 65.
------------------------------------------------------------------------
Minnesot  Yes          No               Two plans,       Yes, but only
 a                                       Basic Plan and   from Extended
                                         Extended Basic   Basic Plan.
                                         Plan.
------------------------------------------------------------------------
Mississi  Yes          No               An individual    Yes,
 ppi                                     under age 65     prescription
                                         who becomes      benefits are
                                         eligible for     covered under
                                         Medicare after   the high-risk
                                         purchasing a     pool.
                                         high-risk pool
                                         plan may keep
                                         the plan as a
                                         Medicare
                                         ``carve-out.''
------------------------------------------------------------------------
Montana   Yes          No               Medicare         Yes
                                         ``carve-out''
                                         offered.
------------------------------------------------------------------------
 North    Yes          Plan F           ...............  No
 Dakota
------------------------------------------------------------------------
Washingt  Yes          No               Medicare         Yes
 on                                      ``carve-out''
                                         offered.
------------------------------------------------------------------------
Wisconsi  Yes          No               Individuals      Yes
 n                                       under age 65
                                         are offered
                                         Medicare
                                         disability
                                         plan.
------------------------------------------------------------------------
Wyoming   Yes          No               High-risk pool   Yes
                                         is secondary
                                         to Medicare.
------------------------------------------------------------------------

                                
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