Changes loom as most-popular Medigap plans face extinction

Government officials estimate 10,000 Americans are reaching the Medicare-eligible age of 65 every day, thanks to the rising tide of aging baby boomers. Anjel Jiron observes that growth every day.

“It's been beautiful. Business is booming,” said Jiron, who has been an insurance broker at Teague Financial Insurance Services in La Mesa, Calif., for a decade. “I've got my phones ringing off the hook for people who are aging into Medicare.”

Over the past several years, many seniors have gravitated toward Medicare Advantage, the HMO version of Medicare that often comes with extra bells and whistles, such as no premiums, eye and dental care, and gym memberships. However, traditional Medicare remains the de facto payer for more than two-thirds of seniors and disabled people, mostly because of the program's freedom to see any provider.

Jiron and other brokers across the country have found many people continue to choose traditional Medicare and pair that coverage with Medicare supplement insurance, commonly known as Medigap, as well as a prescription drug plan.

“As far as our clientele base, 90% of the time, we're selling Medigap,” Jiron said.

But changes loom for Medigap, which has been very profitable for health insurance companies. In addition to pending consolidation that will affect the market, a provision within the new Medicare physician payment law eliminates the most popular types of Medigap plans and therefore will lead to future Medigap enrollees paying more out of pocket for their medical care. The policy change is part of the broader trend of making patients think twice, or at least shop around, before they decide to go to the doctor or hospital.

“They want folks to have that slap on the wrist,” said John Osborn, president of Osborn & Associates, an insurance brokerage in Springfield, Mo. It's also commonly known as giving patients “skin in the game,” although academic literature finds pitfalls with that hypothesis.

People buy a Medigap plan to cover the cost of care that traditional Medicare doesn't pick up, including deductibles, copays and coinsurance. Unlike Medicare Advantage, traditional Medicare does not have a cap on out-of-pocket spending. Medigap plans shield seniors from those potentially ruinous medical costs.

Nearly 12 million people had a Medigap plan in 2015, according to consulting firm Mark Farrah Associates. Prices vary depending on the insurer, age of the enrollee, geography and type of Medigap policy, but it's not difficult for carriers to collect high gross margins.

Companies are able to register quick profits on Medigap plans because the policies are mostly an exercise in actuarial underwriting. Insurers don't have to build provider networks or provide in-home assessments like they do with Medicare Advantage.

“Medigap is a relatively easy product to administer because it doesn't involve managing care in any way,” said Tricia Neuman, director of the Kaiser Family Foundation's Medicare policy program. “It's really a financial transaction.”

Kenneth Clark, chairman of the Medicare supplement work group at the American Academy of Actuaries, added that profitable Medigap companies hold a critical mass of members. “It's about gaining a sizable volume of business and having good retention,” he said.

However, the most common Medigap plans are about to go extinct. Buried within the Medicare Access and CHIP Reauthorization Act—also known as the law that replaced Medicare's sustainable growth rate—rests Section 401. The legislation stipulates that effective Jan. 1, 2020, all newly eligible Medicare beneficiaries cannot sign up for a supplemental plan that covers the Medicare Part B deductible, which is $166 this year. People who already have those types of policies will be exempted.

MACRA more or less outlaws two specific types of Medigap policies: Plan C and Plan F. Those are by far the most popular kinds of Medicare supplemental coverage and are often called the “Cadillac” options by brokers. Those Medigap policies provide first-dollar coverage for every doctor or hospital visit, and more than half of enrollees have plan C or F.

Economists and lawmakers believe Medigap coverage in which beneficiaries don't have to pay anything beyond the premium leads to “moral hazard,” or overconsumption of healthcare services, which inflates Medicare spending.

“Beneficiaries have incentives to receive more care without experiencing many additional costs, and providers have no incentives to manage utilization,” the Medicare Payment Advisory Commission wrote about Medigap plans in 2012.

However, consumer advocates have opposed eliminating the most generous types of supplemental coverage because it could lead seniors to ration their care. “Prohibiting or discouraging Medigap first-dollar coverage would bring the most harm to those beneficiaries who have the greatest need for coverage—the sickest individuals and people with low and modest incomes,” according to the Medicare Rights Center (PDF).

The MACRA policy will change Medigap buying behaviors, and it could lead to more seniors turning to Medicare Advantage when they first become eligible. But there is a major caveat for people who initially choose Medicare Advantage and then later want to go to original Medicare and Medigap.

Medigap insurers are able to medically underwrite enrollees, meaning they can deny people coverage based on health status. Neuman said insurers also only have to sell their plans when Medicare applicants “first enroll in Medicare at age 65 or within a year of trying a Medicare Advantage plan.”

“I can't tell you how many times people have told me they didn't know that,” said Neuman, who recently wrote about how a friend of hers was locked out of Medigap coverage.

Neuman still believes Medigap will remain prevalent after 2020 because Medicare members want to be protected against the lack of an out-of-pocket maximum.

“One of the major reasons seniors opt for a Medigap policy is to have the peace of mind they won't be fully exposed if they have an expensive medical event,” she said.

Correction, June 28, 2016: