With Medicare+Choice plan withdrawals

MONITORING MEDICARE+CHOICE OPERATIONALInsights October 2003, Number 11 The Medigap Market: Product and Pricing Trends, 1999-2001 With Medicare+Choice plan withdrawals and reductions in employersponsored retiree coverage, increasing numbers of Medicare beneficiaries have turned to the Medigap market. There are 10 federally standardized Medigap products with minimum rules for access to them. Recent changes in the distribution of enrollment among product types and In 2001, 28 percent of Medicare beneficiaries bought Medigap insurance, and 32 percent got supplemental coverage from an employer-sponsored plan. The Need for Medigap Coverage Medicare beneficiaries with conventional fee-for-service benefits can incur significant out-of-pocket costs for Medicare s Part A and Part B deductibles and coinsurance as well as major cost items not covered by Medicare, such as prescription drugs. Medigap insurance is designed to pay for some of these costs. In 1992, federal rules established 10 standard Medigap benefit designs: Plans A through J (see Figure 1). All plans cover the basic benefits in Plan A. Only three cover the Part B deductible (C, F, and J) or any prescription drugs (H, I, and J) 1, and just two cover preventive care (E and J). None of the standard Figure 1 Benefits Covered in Standard Medigap Policies by Deborah Chollet Medigap plans covers expenditures for long-term care, other than the skilled nursing or home health care Medicare covers when it is related to an acute condition. In three states that have waivers (Massachusetts, Minnesota, and Wisconsin), Medigap plans may differ from federal standards. In 2001, 28 percent of Medicare beneficiaries bought Medigap insurance, and 32 percent got supplemental coverage from an employer-sponsored plan (MedPAC, 2003). Among those without employer-sponsored coverage or Medicaid, less than half purchased Medigap coverage. However, a growing number of Medicare beneficiaries may be turning to Medigap in average premiums suggest that trouble is brewing in the Medigap market, as it is generally in the health insurance market. Between 1999 and 2001, enrollment in the basic benefit (Plan A) increased as much as enrollment in the other nine plans put together. Meanwhile, the average premium for even basic Medigap coverage jumped more than 13 percent per year. Benefits A B C D E F G H I J a Part A coinsurance and lifetime days Part B coinsurance Blood (first 3 pints a year) Part A deductible Skilled nursing coinsurance Foreign travel emergency At-home recovery Part B excess charges 100% 80% 100% 100% Part B deductible Basic drug benefit b $1,250 $1,250 $3,000 limit limit limit Preventive care SOURCE: Adapted from www.cms.hhs.gov/professionals/partners/nmep/pdfs/materials/nonrenewals/05policy.pdf. Accessed August 5, 2003. a May be sold with no deductible or with a high deductible (for Plan F, $1,530 per year). b Each plan design requires a separate $250 deductible and 50 percent coinsurance on drugs, up to the limit on covered expenses. The Monitoring Medicare+Choice Project of Mathematica Policy Research, Inc., seeks to provide credible and timely information on insurance decisions made by Medicare beneficiaries. It is funded by The Robert Wood Johnson Foundation.

2 insurance as alternative sources of supplemental coverage decline. Enrollment in Medicare+Choice plans has dropped dramatically, and many plans have withdrawn from even the largest urban markets (Gold and McCoy, 2002). And while few employers anticipate terminating coverage for current retirees, many either no longer cover new retirees or anticipate reducing or terminating coverage for future retirees (Kaiser Family Foundation, 2002). In most states and nationwide, Medigap enrollment rose between 1999 and 2001. At the national level, the gain in Medigap enrollment approximately offset the decline in Medicare+Choice. At the state level, however, the changes were rarely offsetting, suggesting the importance of other influences on Medigap enrollment. Enrollment by Type of Plan The only available national data about enrollment in different types of Medigap plans are derived from insurer reporting to each state s department of insurance. Compiled across states by the National Association of Insurance Commissioners (NAIC), these data offer a national picture of Medigap insurance ever purchased during the year. In 2001, 67 percent of Medigap policyholders had standard coverage (see Table 1). However, nearly 27 percent had prestandard coverage that is, a Medigap policy that had been issued before 1992 and renewed continuously since then. About 7 percent had health maintenance organization (HMO) supplemental coverage or nonstandard coverage sold in waivered states.the benefit designs of prestandard policies are unknown, but they probably do not offer particularly generous coverage compared to most standard Medigap plans. Some may offer nominal coverage for prescription drugs. While some prestandard policyholders may have purchased coverage before age 65 as disabled Medicare beneficiaries, the vast majority were at least 77 years old in 2001. While Plan A provides coverage only for the basic benefit, its premium is lower than those for other available policies, apparently making it the most coverage that increasing numbers of Medicare beneficiaries can afford. Plan F accounted for about a third of all standard Medigap policies sold in 2001. In addition to basic Medigap benefits, this plan covers Part B excess charges and the coinsurance for care in a skilled nursing facility (SNF); it typically is sold with no deductible. Plan F provides the same benefits as Plan C, but also covers excess charges. Because physicians rarely have billed Medicare beneficiaries for excess charges, many view the benefits of Plans F and C as in effect identical. Together, these plans accounted for 40 percent of Medigap policyholders in 2001. In contrast, less than 6 percent of Medigap policyholders in 2001 were enrolled in Plans H, I, or J the only standard policies that cover prescription drugs. Of these policyholders, about half (2.8 percent) purchased Table 1 Distribution of Medigap Enrollees by Type of Plan, 2001 the most comprehensive benefit, Plan J. In addition to a higher limit on covered drug expenses ($6,000 per year with 50 percent coinsurance), Plan J covers the Part B deductible and preventive care not otherwise covered by Medicare. All insurers are required to offer Plan A with guaranteed issue to any applicant at any time. 2 Unless state law requires insurers to offer standard policies other than A on a guaranteed-issue basis, prestandard Medigap policyholders may be able to obtain comparable standard coverage only if an insurer is willing to accept them. In 2001, enrollment in Plan A accounted for just 10 percent of enrollment in all standard Medigap policies and 7 percent of Medigap enrollment overall. However, Policy Form Covered Lives, 2001 Distribution of Covered Estimated Change in Estimated Percent (in thousands) Lives, 2001 Covered Lives, 1999-2001 Change in Covered (in percent) (in thousands) Lives, 1999-2001 Standard Plans, Total 6,863.3 66.7% 897.2 15.0% Total A-G 6,292.4 61.2 863.8 15.9 A 717.7 7.0 445.1 163.3 B 629.0 6.1-127.3-16.8 C 1,550.1 15.1 54.2 3.6 D 395.4 3.8 30.7 8.4 E 186.0 1.8 41.9 29.1 F 2,599.9 25.3 380.7 17.2 G 214.3 2.1 68.6 47.1 Total H, I, and J 570.9 5.5 33.5 6.2 H 113.1 1.1-20.1-15.1 I 165.0 1.6 13.5 8.9 J 292.8 2.8 40.1 15.9 Other a 704.6 6.8 277.9 65.1 Prestandard 2,721.7 26.5-364.6-11.8 NOTE: Medigap-covered lives include double-counting of part-year policyholders. a Includes supplemental HMO plans as well as nonstandard policies sold in Massachusetts, Minnesota, and Wisconsin.

between 1999 and 2001, enrollment in Plan A grew faster than it did in any other standard Medigap plan type gaining about a half-million covered lives and nearly tripling enrollment. The net increase in Plan A enrollment between 1999 and 2001 was approximately equal to the net increase in all other standard Medigap plans combined. While the reasons for fast-growing enrollment in the Medigap basic benefit warrant further study, it seems likely that rising Medigap prices, combined with price sensitivity among Medicare beneficiaries leaving Medicare+Choice plans, are contributing factors. Medicare beneficiaries who enter (or re-enter) Medigap coverage at older ages may confront either age- or community-rated premiums that cost much more than the Medicare+Choice plans they left. Moreover, these plans leave beneficiaries with steep costs for items like prescription drugs and still do not meet their growing needs and expenditures for long-term care. While Plan A provides coverage only for the basic benefit, its premium is lower than those for other available policies, apparently making it the most coverage that increasing numbers of Medicare beneficiaries can afford. Premiums Vary Widely The premiums Medicare beneficiaries paid for Medigap coverage varied widely in 2001 3 (see Table 2). On average nationwide, Medigap policyholders paid $1,085 for Plan A, 24 percent less than those with Plan F ($1,433) paid and less than half the premium those in Plan J ($2,130) paid. Reflecting the older age of policyholders in prestandard coverage, Medicare beneficiaries with these policies paid substantially more than those with most standard plan designs $1,754, compared to average premiums of $1,433 and $1,359 for the most popular plans (F and C, respectively). Average premiums rose sharply between 1999 and 2001 for the policy types that also experienced the fastest growth in enrollment. Table 2 Average Premium by Plan Type in 2001 and Change since 1999 Policy Form Average Premium, Premium Change, Percent Change 2001 1999-2001 1999-2001 A $1,085 $238 28.1% B $1,221 $119 10.7 C $1,359 $194 16.7 D $1,359 $299 28.2 E $1,292 $213 19.7 F $1,433 $202 16.5 G $1,458 $476 48.5 H $1,417 -$4-0.3 I $2,091 $407 24.2 J $2,130 $453 27.0 Other a $1,713 $209 13.9 Prestandard $1,754 $178 11.3 NOTE: Average premiums are weighted by covered lives. a Includes supplemental HMO plans as well as nonstandard policies sold in Massachusetts, Minnesota, and Wisconsin. Average premiums for Plan A increased 28 percent (more than 13 percent per year). Premiums for Plans F and C increased nearly 17 percent, while those for Plan G surged 49 percent. Medicare beneficiaries with Medigap policies that covered prescription drugs also paid significantly more in 2001 than they did in 1999. However, reflecting these plans low limits on drug coverage, premiums for Plans H, I, and J did not rise noticeably faster than premiums for other standard plan types. Average premiums for Plan H changed very little and, nationally, actually declined slightly with the net increase in policyholders. For the relatively popular J coverage, The premiums Medicare beneficiaries paid for Medigap coverage varied widely in 2001, from a nationwide average of $1,085 for Plan A to $2,130 for Plan J. 3 average premiums increased 27 percent, almost the same rate of increase paid by policyholders with A coverage. Average premiums for Medigap policies differed greatly from state to state. Medicare beneficiaries in California, Florida, and Louisiana paid the highest premiums in the nation for Plans A through G in 2001 averaging as much as $1,842 in California (see Table 3). In Florida and Louisiana, the average premium for a Medigap plan with prescription drug coverage (H, I, and J) also was among the highest in the nation ($2,721 and $2,530, respectively). Only in New York and Idaho were the average premiums for a Medigap drug policy higher ($2,860 and $2,825, respectively). Averaging across all standard Medigap policies, Medicare beneficiaries in the most expensive states paid about twice as much for Medigap coverage as did those in the least expensive states such as Montana, Pennsylvania, Utah, and Vermont. Number of Insurers In most states, a large number of insurers offer Medigap coverage, although most offer just one or two standard plan designs in addition to Plan A. While a much larger number of insurers actually write coverage, many

4 Table 3 Covered Lives and Average Premiums by State for A-G and H-J Policies, 2001 ALL STANDARD POLICIES A-G POLICIES H-J POLICIES State Covered Lives Average Premium Covered Lives Average Premium Covered Lives Average Premium (in thousands) (in thousands) (in thousands) AK 6.1 $1,416 3.3 $1,267 1.3 $1,804 AL 209.9 $1,400 199.2 $1,394 1.1 $2,460 AR 154.1 $1,448 35.8 $1,408 1.4 $2,443 AZ 108.9 $1,590 72.9 $1,547 7.4 $2,011 CA 232.3 $1,842 109.2 $1,760 25.0 $2,203 CO 91.6 $1,501 58.4 $1,440 6.0 $2,103 CT 217.7 $1,402 90.6 $1,335 11.1 $1,945 DC 7.2 $1,673 3.3 $1,618 0.9 $1,866 DE 27.7 $1,340 10.2 $1,250 2.6 $1,698 FL 620.3 $1,757 410.2 $1,712 19.1 $2,721 GA 226.6 $1,492 140.3 $1,454 6.4 $2,319 HI 5.8 $1,510 3.8 $1,467 0.7 $1,739 IA 275.0 $1,362 178.2 $1,318 11.9 $2,013 ID 59.9 $1,466 51.6 $1,426 1.5 $2,825 IL 559.9 $1,441 383.9 $1,388 13.6 $2,934 IN 291.4 $1,417 196.9 $1,362 13.9 $2,188 KS 193.1 $1,451 133.2 $1,418 4.0 $2,555 KY 178.7 $1,465 109.9 $1,350 16.2 $2,248 LA 132.5 $1,672 93.8 $1,642 3.3 $2,530 MA 190.3 na na na na na MD 157.5 $1,421 92.2 $1,395 15.5 $1,570 ME 86.9 $1,428 69.1 $1,330 9.6 $2,129 MI 176.6 $1,400 307.6 $1,388 4.5 $2,178 MN 257.3 na na na na na MO 280.7 $1,501 172.2 $1,434 12.7 $2,410 MS 121.5 $1,558 76.5 $1,495 5.1 $2,497 MT 257.0 $311 172.7 $322 30.3 $244 NC 343.3 $1,540 209.4 $1,349 47.0 $2,393 ND 62.6 $1,244 57.9 $1,235 0.8 $1,860 NE 136.1 $1,452 91.5 $1,416 3.4 $2,435 NH 70.0 $1,541 32.0 $1,435 6.3 $2,075 NJ 302.0 $1,501 143.6 $1,374 28.5 $2,146 NM 47.6 $1,361 29.9 $1,325 3.8 $1,646 NV 35.3 $1,591 23.5 $1,516 3.2 $2,150 NY 495.1 $1,442 242.8 $1,286 26.7 $2,860 OH 321.8 $1,512 191.8 $1,448 18.8 $2,170 OK 87.5 $1,597 60.3 $1,564 2.3 $2,475 OR 89.6 $1,403 55.1 $1,307 6.2 $2,253 PA 1,059.6 $976 715.8 $962 75.1 $1,108 RI 13.5 $1,491 38.3 $1,478 0.7 $2,244 SC 167.9 $1,450 127.8 $1,422 4.5 $2,222 SD 69.5 $1,296 50.0 $1,248 1.7 $2,726 TN 125.6 $1,540 88.6 $1,513 3.5 $2,225 TX 526.8 $1,560 392.4 $1,517 17.3 $2,527 UT 84.4 $1,292 47.0 $1,125 11.9 $1,952 VA 273.5 $1,566 130.1 $1,443 43.6 $1,933 VT 35.0 $1,223 19.4 $1,173 2.2 $1,653 WA 200.0 $1,543 112.8 $1,392 25.6 $2,205 WI 305.6 na na na na na WV 72.1 $1,492 38.0 $1,413 4.9 $2,099 WY 26.5 $1,372 18.1 $1,335 1.5 $1,819 NOTE: Total covered lives include nonstandard and HMO enrollees not included in standard policy enrollment totals; all counts include double-counting of part-year policyholders. Average premiums are weighted by covered lives and are not presented for Massachusetts, Minnesota, and Wisconsin, where Medigap benefit designs may differ from federal standards.

The presence of more insurers per capita may reflect practices that discourage consumers from changing insurers and make persistently low market share feasible. renew existing coverage but do not accept new applicants. The variation in available Medigap insurers across states is remarkable even when adjusted for the number of Medicare beneficiaries in the state and beneficiaries choice of insurer may be significantly greater in some states than in others. Similar to the pattern observed in major medical health insurance markets (Chollet et al., 2003), states with more people typically have many fewer Medigap insurers per person. Thus, Massachusetts, New York, California, and New Jersey have a fraction of the number of Medigap insurers per Medicare beneficiary that Montana, North Dakota, South Dakota, Alaska, and Wyoming have (see Table 4). However, some states (such as Montana and South Dakota) also have high absolute numbers of Medigap insurers, many with very little business in the state. It is unclear whether the presence of more insurers per capita represents greater competition. Instead, it may reflect uncompetitive markets, with insurer practices that discourage consumers from changing insurers and make persistently low market share feasible. In either case, insurers with very low market share may be quite vulnerable to a major change in Medicare benefits. Lessons from Medigap Markets The Medigap market suggests several lessons that may be relevant to the Medicare Part D (prescription drug) proposals passed by the House and Senate this year (H.R. 1 and S. 1, respectively) 4. First, without specific attention to prestandard policyholders, many may remain in their current coverage choosing not to pay for Part D as well as for drug coverage in their prestandard Medigap plan, however meager it may be. Both proposals would terminate drug coverage in Plans H, I, and J and require insurers to notify policyholders about their reduced coverage and new Part D options. However, neither would require insurers to notify the much larger block of prestandard policyholders or guarantee their entry into standard Medigap coverage other than Plan A. Thus, despite launching a major information campaign, it may take a number of years for many Medicare beneficiaries to trade prestandard Medigap coverage for the complex array of Part D coverage choices that both proposals envision. Ironically, since these policyholders are now at least 77 years old, they may be in even greater need of drug coverage than younger beneficiaries. Second, the variation in Medigap premiums across and within states is notorious and persistent (Chollet and Kirk, 2001; Weiss Ratings, 2003). Federal efforts to develop more comprehensive coverage for prescription drugs may result in an even wider spread of costs than Plans H, I, and J currently experience, as the limits on drug coverage are raised. Broad participation in a Medicare drug plan would reduce the adverse selection that now contributes to relatively high costs and premiums for Plans H, I, and J. Differences in health status, prescribing practices, drug prices, and state regulation of Medigap plans, however, probably would continue to drive strong geographic differences in premiums and beneficiaries out-of-pocket costs. Finally, in states with a large number of Medigap insurers, very few may be poised to offer freestanding prescription drug coverage to Medicare beneficiaries. In these states, Medicare coverage of prescription drugs Table 4 Active Medigap Insurers and Change per Medicare Beneficiary by State, 1999-2001 (states sorted by active insurers per beneficiary) State Number of Active Insurers Active Insurers, per 10,000 2001 Medicare Beneficiaries, 2001 WY 33 5.0 AK 18 4.1 SD 41 3.4 ND 32 3.1 MT 41 3.0 DE 27 2.4 DC 16 2.1 ID 33 2.0 NE 47 1.8 NM 43 1.8 VT 16 1.8 UT 37 1.8 NV 42 1.7 MS 51 1.2 NH 19 1.1 KS 43 1.1 WV 34 1.0 OK 51 1.0 RI 17 1.0 CO 46 1.0 ME 21 1.0 IA 43 0.9 SC 51 0.9 AR 37 0.8 KY 46 0.7 HI 12 0.7 OR 35 0.7 AZ 47 0.7 LA 41 0.7 IN 51 0.6 TN 50 0.6 MO 50 0.6 WI 43 0.5 VA 48 0.5 GA 49 0.5 WA 35 0.5 AL 30 0.4 CT 22 0.4 MN 28 0.4 MD 27 0.4 NC 45 0.4 IL 58 0.4 OH 58 0.3 MI 48 0.3 TX 65 0.3 PA 42 0.2 FL 44 0.2 NJ 13 0.1 CA 36 0.1 NY 14 0.1 MA 7 0.1 US average 36.9 0.5 NOTE: Active insurers are defined as those that have in force at least one policy issued during the past three years. 5

6 could change the Medigap market radically if beneficiaries felt forced to choose between Medicare drug coverage and their current Medigap coverage either dropping Medigap altogether or moving in still greater numbers to Plan A. Medigap insurers with low market share may not be able to tolerate both the loss of their conventional business and the cost of developing new products with new federal standards, even if the service areas for prescription drug plans encompassed several states. Thus, the development of Medicare drug plans could force the exit of many Medigap insurers from states that have more crowded markets, possibly disrupting coverage for many Medicare beneficiaries. About the Data Information is based primarily on insurers reporting to each state s department of insurance and compiled by the NAIC. These data offer a state-level picture of Medigap insurance ever purchased during the year. Because the data double-count individuals who change policies during the year, the total number of policyholders in a year may exceed the number of Medicare beneficiaries who report having Medigap coverage. The data measure shifts in enrollment conservatively, counting policyholders who change coverage mid-year as two separate enrollees rather than as a shift in enrollment. Notes 1. Plans H and I have a $250 annual prescription drug deductible, and then they pay 50 percent of prescription drug expenditures up to $2,500 per year. The policyholder pays out of pocket all additional costs for prescription drugs. J plans also have a $250 annual deductible and pay 50 percent of prescription drug expenditures up to $6,000 per year. 2. Insurers offering guaranteed-issue policies may not deny coverage to any applicant because of his or her health status. All Medigap insurers must offer Plan A with guaranteed issue. Insurers that offer Plans B, C, or F also must accept Medicare beneficiaries when they lose coverage from an employer plan (due to plan termination or benefit change) or a Medicare managed care plan (due to market exit). Beneficiaries in either situation must purchase coverage within 63 days. 3. Because enrollment in plans with more comprehensive benefits may be greater in states where premiums are lower, national average premiums for plans with less comprehensive benefits are sometimes greater than those for more comprehensive benefits. Within states, premium patterns are more regular. 4. The Congressional Budget Office (2003) and Health Policy Alternatives (2003) offer comparison and analysis of these bills. References Chollet, Deborah, and Adele Kirk. Medicare Supplement Insurance Markets: Structure, Change and Implications for Medicare. Report to the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services, 2001. Chollet, Deborah, Fabrice Smieliauskas, and Madeleine Konig. Mapping Health Insurance Markets 2001: Market Structure and Change. The Robert Wood Johnson Foundation s State Coverage Initiatives Program. Washington, DC: AcademyHealth, September 2003. Congressional Budget Office. Congressional Budget Office Cost Estimate: H.R.1 and S. 1. ftp://ftp.cbo.gov/44xx/doc4438/hr1s1.pdf (July 22, 2003). Accessed August 27, 2003. Gold, Marsha, and John McCoy. Medicare+Choice Withdrawals: Experiences in Major Metropolitan Areas. Operational Insights No. 8. Washington, DC: Mathematica Policy Research, Inc., September 2002. Health Policy Alternatives, Inc. A Side-by-Side Comparison of the Prescription Drug Coverage Provisions of S. 1 and H.R. 1. www.kff.org/content/2003/6103/6103.pdf (August 8, 2003). Accessed August 27, 2003. Kaiser Family Foundation. Employee Health Benefits: 2002 Annual Survey. www.kff.org/content/2002/3251/3251-section11.pdf. Accessed August 28, 2003. Medicare Payment Advisory Commission (MedPAC). Report to the Congress: Variation and Innovation in Medicare. Washington, DC: MedPAC, June 2003. Weiss Ratings, Inc. Consumers Face Huge Disparities in Medigap Rates. www.weissratings.com/news/ins_medigap/ (July 14, 2003). Accessed August 27, 2003. Operational Insights is published by the Washington office of Mathematica Policy Research, Inc. Visit our Web site at www.mathematica-mpr.com Princeton Office P.O. Box 2393 Princeton, NJ 08543-2393 Phone: (609) 799-3535 Fax: (609) 799-0005 Washington Office 600 Maryland Ave., S.W., Suite 550 Washington, DC 20024-2512 Phone: (202) 484-9220 Fax: (202) 863-1763 Cambridge Office 50 Church St., 4th Floor Cambridge, MA 02138-3726 Phone: (617) 491-7900 Fax: (617) 491-8044 Marsha Gold: Project Director, Monitoring Medicare+Choice The Stein Group: Editor designmind: Design