Medigap Insurance: Alternatives for Medicare Beneficiaries to Avoid Medical Underwriting
Released: 1996-09-10T00:00:00

Letter

Background

Medicare is a federal health insurance program that helps its beneficiaries pay for health services. The program does not cover every type of health service, and beneficiaries are responsible for deductibles and coinsurance. Medigap insurance, which is designed to supplement Medicare’s benefits, is regulated by federal and state law. Insurers must meet federal and state requirements to market policies as Medigap insurance.

Section 1882 of the Social Security Act established federal requirements for the marketing, benefits, and performance of Medigap policies. Starting in 1992, Medigap policies were required to conform to 1 of 10 standardized sets of benefits, referred to as plans A through J. For example, standard policy A covers Medicare coinsurance; policy C covers Medicare coinsurance and inpatient deductibles; and policy J covers these cost-sharing components as well as several services not covered by Medicare, such as prescription drugs. These are the only Medigap plans that can be sold in most states. Companies are not required to offer all 10 plans, and many do not. (See app. II for a description of the items covered under each of the 10 plans.)

The Omnibus Budget Reconciliation Act (OBRA) of 1990 authorized the Medicare SELECT program, a 3-year demonstration project in 15 states. Medicare SELECT policies combine certain managed care concepts with the 10 standard Medigap policies. SELECT policies require the insured to use the doctors and hospitals on the plan’s provider panel or pay higher cost-sharing amounts. The SELECT program was extended to June 30, 1998, and expanded to all states by Public Law 104-18.

Federal law guarantees that, for a period of 6 months from the date a Medicare beneficiary both enrolls in Medicare part B and is age 65 or older, the beneficiary has a right to buy the Medigap policy of his or her choice regardless of any health problems the beneficiary may have. The Medigap open enrollment period at age 65 is also available to all disabled and kidney failure beneficiaries who have previously enrolled in Medicare part B. Thus, Medigap policies are required to be “guaranteed issue” during the 6-month period. Once the 6-month Medigap open enrollment period starts, it cannot be extended or repeated. Beneficiaries are informed of the 6-month open enrollment period when they enroll in Medicare.

Insurers who sell Medigap policies outside the open enrollment period are allowed to use medical underwriting. Prospective policyholders usually must complete an application form that includes several questions about their health and habits. A “yes” response to any question can trigger a rejection of the application.

Enrollment in an HMO with a Medicare risk contract can be viewed as a substitute for a Medigap policy. Like Medigap policies, HMOs often fill some of the gaps in Medicare coverage. In return for a fixed monthly payment from Medicare for each beneficiary enrolled, the HMO must provide or arrange for all services covered by Medicare. HMO enrollees generally must use the HMO’s doctors and hospitals for all their care, except in emergencies. Services obtained outside the HMO network generally will not be paid for by either the HMO or Medicare. The HMO cannot reject an application because of bad health, except for permanent kidney failure. Some HMOs charge the beneficiary a premium for the benefits not otherwise covered by Medicare, while other HMOs do not.

Employer-sponsored retiree health insurance also acts as a Medigap policy for some Medicare beneficiaries. Although these plans generally provide benefits similar to those of Medigap policies, they are not regulated as Medigap insurance. Nor is limited-benefit insurance, such as hospital indemnity plans, long-term care policies, and cancer insurance, regulated as Medigap insurance.

Applicants for Medigap Insurance Are Often Subject to Medical Underwriting, but Alternatives Are Available

Medigap insurers are permitted to use medical underwriting after an individual’s 6-month open enrollment period has closed, and many of them do. However, Medicare beneficiaries who wish to change Medigap policies have at least one alternative that does not involve medical underwriting and, depending on where they live, may have several alternatives. Although currently there are alternatives for Medigap policyholders to switch policies, federal law does not guarantee that those alternatives will continue in the future.

Under the Medicare SELECT program, NAIC’s model regulation guarantees policyholders the ability to switch to at least the lowest-benefit Medigap plan if they decide to go back to a regular Medigap policy and if the SELECT insurer offers Medigap policies. Also, federal law requires risk-contract HMOs to offer an annual open enrollment during which all must be accepted in the order they apply up to the HMO’s beneficiary enrollment limit.

Alternatives Available to Medigap Policyholders

Of the largest 25 Medigap insurers, 11 companies used medical underwriting for applicants who wished to purchase a Medigap policy after their 6-month open enrollment period expired. Five companies used medical underwriting for applicants for some policies, especially policies with prescription drug coverage, while offering other policies as guaranteed issue. The remaining nine companies offered all their policies as guaranteed issue. (See app. III for a list and selected characteristics of the 25 companies we reviewed.)

All 16 companies that used medical underwriting gathered information on applicants’ medical history and health status on the Medigap application form. For example, applicants could be asked if they had had cancer. For 11 of the 16 companies, a “yes” response to any health question would lead to rejection of the Medigap application. The other five companies told us they would consider additional factors. For example, if an applicant indicated having had an illness during the last 5 years, one company would compare the illness with a list of deniable medical conditions before a determination was made.

Twelve of the 14 insurers that offered at least one policy as guaranteed issue were Blue Cross/Blue Shield companies, which had market areas generally limited to one state. Prudential, which sold its Medigap insurance through an arrangement with the AARP, offered 7 of the 10 Medigap standard plans as guaranteed-issue policies to AARP members, and membership was open to all elderly. Eleven of the 14 companies that sold at least one guaranteed-issue policy offered only the less comprehensive Medigap plans—those without prescription drug coverage—on a guaranteed-issue basis. The other three companies offered plans with prescription drug coverage. The various medical underwriting practices of the 25 companies are summarized in table 1.

Six of the 16 companies that used medical underwriting were able to provide us with information on the number of applications they rejected. In 1995, the rejection rates for these companies ranged from 1 percent to 54 percent. The two highest rejection rates were from companies that required medical underwriting on policies with drug coverage but offered all other policies as guaranteed issue. One of the lower rejection rates, 2 percent, was reported by a company that requires underwriting for all policies. In 1995, this company received 83,000 applications from individuals whose 6-month open window had closed and rejected 1,096 applications for medical reasons. The reason most frequently cited by companies for rejecting an application was medical problems.

The majority of Medicare beneficiaries have policies issued before Medigap policies were standardized into 10 policy forms in 1992. These prestandardized policies can no longer be sold to new customers. Twelve of the 16 companies that submitted some or all of their applications to medical underwriting allowed their policyholders to switch from a prestandardized Medigap policy to a standardized Medigap policy without medical underwriting, if the benefits were comparable with or less comprehensive than those of the prestandardized policy. Two other companies allowed their prestandardized policyholders to switch into any standardized policy without medical underwriting. All 16 companies allowed a policyholder to switch from one standardized policy to a lesser-benefit standardized policy without medical underwriting. A switch to a policy that provided more benefits, in most cases, was subject to medical underwriting.

Medicare SELECT Policyholders Have Choices

Federal law requires insurers to offer Medicare beneficiaries who want to leave the Medicare SELECT program the option of purchasing a traditional Medigap policy. States have interpreted this requirement differently. However, the NAIC model regulations require SELECT insurers to offer a standard Medigap policy, if the insurer sells them, to those individuals who wish to drop their SELECT policy. The policy offered must have comparable or lesser benefits and must be available regardless of the individual’s health. A recent report on the Medicare SELECT program found that most of the original 15 demonstration states determined that offering the basic Medigap plan “A” meets this requirement.

Risk-Contract HMOs Offer Another Alternative

HMOs with Medicare risk contracts often have lower cost-sharing than the fee-for-service program—or no cost-sharing at all—and also often cover additional services. Thus, HMOs with Medicare risk contracts can be viewed as an alternative to Medigap insurance. However, by enrolling in an HMO, a beneficiary agrees to relinquish the right to choose providers of care. Also, if the beneficiary decides to return to the fee-for-service program, Medigap insurers can use medical underwriting to determine whether to sell the person a policy.

Under their agreements with Medicare, risk-contract HMOs must accept all eligible Medicare applicants in order of application, during an annual open enrollment period, except those enrolled in a hospice plan and those who have been diagnosed with permanent kidney failure. Medicare HMOs serve areas in 37 states and the District of Columbia, although they currently are concentrated in relatively few states. Over 45 percent of the 223 risk-contract HMOs are located in five states and enrolled over 65 percent of the 3.7 million Medicare HMO enrollees as of July 1996. Most other states had few risk-contract HMOs, and 13 states had no risk-contract HMO. While the availability to beneficiaries of HMOs across the country is far from uniform, risk-contract HMOs are available in states where a large number of Medicare beneficiaries reside.

Medicare Beneficiaries Seldom Change Health Plans

Most elderly Medicare beneficiaries do not replace their private health insurance coverage but many do add to existing coverage. HCFA’s Medicare Current Beneficiary Survey data show that about 99 percent of the 19.5 million beneficiaries who had private insurance in 1991 and were alive in 1994 had the same plans in 1994. The remaining 1 percent of these beneficiaries either switched plans, dropped plans, or made other changes during the 1991-94 period. About 25 percent of the 19.5 million added plans to supplement those they had in 1991 (see table 2). In addition, over 1 million beneficiaries who did not have a private supplemental policy in 1991 had obtained one or more by the end of 1994. The data allowed us to compare only coverage by plan name, and we could not identify those instances in which the beneficiary switched coverage within the same plan. For example, we could not identify a case where a beneficiary switched from Medigap plan C to Medigap plan F if the plan name was Blue Cross/Blue Shield in both 1991 and 1994.

For purposes of HCFA’s survey, private insurance included individually purchased plans (primarily Medigap policies); health plans from former employers; and other plans that might cover hospital, physician, or drug charges. HCFA’s survey excluded long-term care, hospital indemnity, and specified disease insurance from the private insurance category, but it is possible that beneficiaries reported these types of limited-benefit plans as individually purchased plans.

Between 1991 and 1994, about 4.8 million beneficiaries added private health insurance plans to their existing coverage. Of these beneficiaries, about 4 million had only one policy in 1991; added coverage resulted in their owning multiple policies in 1994. Table 3 shows that in 1994 over 1.3 million beneficiaries had multiple Medigap policies and 1.4 million had multiple employer-sponsored plans. One reason why beneficiaries can be covered by multiple employer-sponsored plans is that both spouses can have plans that also cover the other spouse.

Federal law prohibits an insurer from selling a beneficiary a second Medigap policy unless the beneficiary states in writing that he or she intends to cancel the first policy after the replacement policy goes into effect. Because so many beneficiaries reported purchasing Medigap policies when they already owned one, it appears that the law may not actually be preventing beneficiaries from owning multiple policies.

Few Medigap Underwriting Complaints Have Been Made

Since 1993, NAIC has maintained a central database of formal complaints made to state insurance departments. This system has a category for underwriting complaints but it does not break the category into components such as medical underwriting. According to NAIC’s data, underwriting was the basis for 18 percent of the formal Medigap complaints to state insurance departments in 1994 and 1995.

In 1994, 3 out of a total of 391 Medigap complaints relating to underwriting cited “refusal to insure after open enrollment period” as the reason for the complaint; in 1995, 1 out of 316 gave this reason. According to NAIC data, over 50 percent of the underwriting complaints in both 1994 and 1995 cited premium and rating method concerns.

Insurance department officials from the 10 states with the largest Medicare populations said their departments received few Medigap complaints, and even fewer complaints relating to medical underwriting, in the last few years. Officials in five states attributed the current low volume of Medigap complaints to the changes made under OBRA 1990, which increased consumer protections and required that Medigap policies be standardized. Several officials also commented that it is not surprising that few formal complaints about medical underwriting are made because that practice is permissible and people are told as much at the informal telephone contact stage.

The six consumer groups we contacted believed that Medigap medical underwriting practices resulted in some individuals’ being unable to obtain or change coverage, but the groups did not have statistical data describing the magnitude of the problem. These groups noted that although Medigap medical underwriting after the 6-month open enrollment period was a matter of concern, Prudential offered a continuous open market for Medigap policies through its arrangement with AARP.

Legislative Option to Prevent Medical Underwriting

Because the current alternatives for avoiding medical underwriting are not required by law to be available, the situation could change in the future. One way to ensure that medical underwriting does not become a problem in the future would be to require Medigap insurers to offer policies with comparable benefit packages on a guaranteed-issue basis to individuals who have been continuously covered under Medigap. In this case, however, concerns might arise that because individuals can always buy a guaranteed-issue policy they might be encouraged to postpone purchase until they know they are likely to use the policy. However, if a condition for access to guaranteed-issue policies is continuous coverage under a similar policy, this concern is no longer an issue. Another potential problem is that individuals could seek to upgrade to more benefit-rich policies if they expected to use one of the new benefits. Again, this would not be a problem if insurers had to offer only policies with benefits comparable with the individual’s current policy.

Employer-sponsored retiree health plans and HMOs with Medicare contracts can be viewed as substitutes for Medigap policies. Problems with maintaining Medicare supplement coverage can also occur if beneficiaries choose or are forced to change from these Medigap substitutes. We previously reported on potential problems in obtaining Medigap policies for those beneficiaries covered by employer-sponsored plans if their plan is terminated or benefits are downgraded. Beneficiaries can be forced to discontinue HMO enrollment for such reasons as relocating to an area where no HMO participates in Medicare. Also, some beneficiaries want to discontinue HMO coverage but feel that they cannot do so. The HHS Office of Inspector General reported that, in 1994, 10 percent of beneficiaries who were enrolled in HMOs (almost 94,000 people) wanted to end their enrollment but felt that they could not because of financial reasons, which could include concern about the availability of a Medigap policy. Beneficiaries with substitutes for Medigap who seek Medigap policies could be protected from medical underwriting under the legislative option discussed above if continuous coverage under a Medigap policy is defined to include enrollment in employer-sponsored health plans and in HMOs with Medicare contracts.

Conclusion

Most beneficiaries obtain private insurance to supplement Medicare when they become eligible for the program at age 65. Few beneficiaries subsequently decide to change their policies, and those that do have at least one alternative for changing without being subject to medical underwriting. However, these alternatives are not guaranteed by federal law, and it is possible that circumstances could change in the future. Federal Medigap law (section 1882 of the Social Security Act) could be amended to furnish such a guarantee to beneficiaries who have been continuously covered by Medigap. Such a change should not have any major effect because it would not alter beneficiary incentives for Medigap coverage.

Matters for Consideration by the Congress

If the Congress is concerned that the current alternatives available to Medicare beneficiaries who wish to change Medigap policies might not exist in the future, the Congress could amend federal Medigap law. Such an amendment could require insurers to offer Medicare beneficiaries who have been continuously covered by Medigap insurance guaranteed-issue policies with benefit packages comparable with those of the policy they currently hold. The Congress may also wish to consider extending this protection to beneficiaries whose employer-sponsored retiree health plans are terminated or curtailed and who must or choose to leave their HMOs.

In commenting on a draft of this report, NAIC representatives agreed with our factual presentation and our conclusions. NAIC did offer some technical suggestions, which we incorporated where appropriate.

We are sending copies of this report to NAIC, the Secretary of Health and Human Services, and other interested congressional committees and individuals. We will make copies available to others on request.

If you have any questions, please call me on (202) 512-6806 or Tom Dowdal, Assistant Director, on (202) 512-6588. Other contributors to this report are listed in appendix IV.

Scope and Methodology

Scope

We obtained from the National Association of Insurance Commissioners (NAIC) their computerized database of insurance companies’ Medigap annual experience exhibits for 1994. The database identified 354 insurance companies and reported total earned premiums of $12.6 billion. We limited our review of medical underwriting to the 25 largest sellers of Medigap insurance. These companies had earned premiums of about $8.3 billion, or over 65 percent of the total. We did not test the accuracy of the database but our prior work has shown these databases to be highly accurate.

Methodology

To identify the extent to which medical underwriting is used in the Medigap market, we interviewed knowledgeable officials from the 25 largest sellers of Medigap insurance on their underwriting practices.

To determine how frequently Medicare beneficiaries change private health plans, we obtained access to the computerized results of round 1 and round 10 of the Health Care Financing Administration’s (HCFA) Medicare Current Beneficiary Survey, a continuous, multipurpose survey of a representative sample of the Medicare population. Round 1 and round 10 interviews were conducted in the last 4 months of calendar years 1991 and 1994, respectively. These interviews captured baseline information on a sample of Medicare beneficiaries (12,677 in 1991), including information on supplemental coverage from private insurance and Medicaid. For purposes of HCFA’s survey, private insurance included an individually purchased plan (that is, a Medigap policy); health plans from former employers; and other plans that might cover hospital, physician, or drug charges. HCFA’s survey excluded long-term care, hospital indemnity, and specified disease insurance from this insurance category. We compared, by plan name, the private insurance that Medicare beneficiaries aged 65 and older had in 1991 with the plans these same beneficiaries had in 1994 and identified and analyzed differences. We did not verify the accuracy of the information in the computerized file.

To assess whether elderly Medicare beneficiaries are complaining about Medigap medical underwriting practices, we obtained from NAIC’s complaint data system a computerized file of Medigap complaints in 1994 and 1995. The NAIC data system is developed from information provided by state insurance departments on closed complaints. We analyzed the data on the 2,110 Medigap complaints identified in 1994 and the 1,732 identified in 1995. We supplemented these data by interviewing officials from the insurance departments of the 10 states with the largest elderly populations and by interviewing officials from 6 consumer/advocacy groups. We did not verify the accuracy of the information in the computerized file.

Sampling Errors

Data reported in tables 2 and 3 are derived from the computerized results of the Medicare Current Beneficiary Survey. Because these data are derived from a sample, each estimate has a sampling error associated with it. The size of the sampling error reflects the precision of the estimate: The smaller the sampling error, the more precise the estimate. We computed sampling errors for tables 2 and 3 at the 95-percent confidence level. This means that the chances are about 95 out of 100 that the actual number or percentage being estimated falls within the range defined by our estimate, plus or minus the sampling error. Tables I.1 and I.2 show the sampling errors for tables 2 and 3, respectively.

In addition, other beneficiary estimates presented in the report have the following sampling errors: for the 19.5 million beneficiaries who had private insurance, the sampling for the more than 1 million beneficiaries who did not have a private supplemental policy in 1991 but had at least one in 1994, the sampling for the 4.8 million beneficiaries who added private health insurance plans, the sampling error was – .3 million.

Features of Standardized Medicare Supplement Plans

In 1991, the NAIC approved the following 10 standardized benefit combinations (plans A through J) for Medicare supplement policies. Forty-four states, the District of Columbia, Puerto Rico, and the Virgin Islands approved all 10 plans. Pennsylvania and Vermont approved seven; Delaware approved six; and Massachusetts, Minnesota, and Wisconsin had alternative simplification programs in effect and have waivers that exempt them from these standard plans. Benefits included in a plan are marked by “X.”

Basic benefits pay the beneficiary’s Medicare part B coinsurance (generally 20 percent of Medicare-approved charges after the $100 annual deductible), part A coinsurance for the 61st-90th day of a Medicare-covered hospital stay, part A coinsurance during the use of a beneficiary’s 60 lifetime reserve days, eligible expenses after a beneficiary’s hospital benefits are exhausted up to a lifetime maximum of 365 days, and parts A and B blood deductible (3 pints).

Part B excess charges are the difference between the actual charge for a service or item and the Medicare-allowed charge for that service or item. Medicare prohibits charging more than 115 percent of the Medicare-allowed charge.

25 Largest Sellers of Medigap Insurance

Primary method for calculating premiums$2,525,855,458 A through J 555,536,690 A, B, and H 519,636,376 A, B, C, D, F, 365,244,297 A, B, C, and H Single 305,529,121 A, B, C, D, 254,696,911 A, B, D, E, 203,832,750 A, B, C, F, I, 183,430,118 A, C, F, and I Multiple 180,965,855 A, B, C, D, E, F, G, and I (continued)

Primary method for calculating premiums180,200,050 A, B, C, D, F, 179,058,000 A, C, F, and I 157,659,892 A, C, E, F, 155,410,958 A, C, and H 154,283,955 A, B, C, D, F, 151,782,693 A, B, C, and F Multiple 134,673,000 A, C, and F 130,848,816 A,B,C, and H Single (continued)

Major Contributors to This Report

Thomas Dowdal, Assistant Director, (202) 512-6588 William Hamilton, Evaluator-in-Charge Michael Piskai Robert DeRoy The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.

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