oversight

Medigap Insurance: Expected 1990 Premiums After Repeal of the Medicare Catastrophic Coverage Act and 1988 Loss Ratio Data

Published by the Government Accountability Office on 1990-02-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                   United States General Accounting OflIce / 40   5-3 g
                   Testimony
GAO
                                                                  IIII Ill1
                                                                    140538



For Release          HEDIGAP INSURANCE:
on Delivery          Expected 1990 Premiums After Repeal of
Expected at          the Medicare Catastrophic  Coverage
10:00 a.m. EST       Act and 1988 Loss Ratio Data
Friday
February 2, 1990




                    Statement of
                    Janet Shikles, Director
                      Health Financing and Policy
                      Issues
                    Human Resources Division
                    Before the
                    Subcommittee on Medicare and
                      Long-Term Care
                    Committee on Finance
                    United States Senate




GAO/T-HRD-90-11
                                    SUMMARY
      Almost from the beginning      of Medicare in 1966 private
insurance   companies have offered      Medigap policies     designed to pay
some or all beneficiaries'      deductibles     and coinsurance.     In 1980,
the Congress established     federal    requirements    that must be met
before insurers    can market Medigap policies.
       In 1988, the Congress passed,the    Medicare Catastrophic
Coverage Act, one of the most significant       expansions  of the
program since its beginning.      In November 1989, the Congress
repealed the Act and'restored     Medicare benefits    to what they       were
before the Catastrophic    Coverage Act.
        GAO recently     surveyed 29 commercial Medigap insurers
concerning     their   1990 premiums for Medigap insurance.          Twenty
insurers    responded and told GAO that they expect to increase             their
1990 premiums for Medigap insurance         by an average of 19.5 percent
over their     1989 premiums.      The companies attributed     about half of
this increase       to increased   benefits and administrative       costs
necessitated      by repeal of the Catastrophic      Act.    The companies said
that the other half of the increase was due to factors               such as
inflation,     increased     use of health services,   and prior     years'
claims experience.         For 19 companies, the increases      will   range from
a low of 5.0 percent to a high of 51.6 percent,             and one company
said it expects its 1990 premium to remain unchanged.
      The Blue Cross and Blue Shield Association       also surveyed its
member organizations.     The Association    said that 38 organizations
responded,   and the median increase     in 1990 non-group Medigap
insurance  premiums would be about 29 percent.
       The   1988 loss ratios     of 34 percent of the commercial
companies      with over $250,000 in earned premiums from individual
policies     in force for more than 3 years were below the minimum
standard     of 60 percent.      For Blue Cross/Blue  Shield plan
individual      policies,   about 98 percent met or exceeded the minimum
standard.       For group plans, about 66 percent of commercial
companies      and 24 percent of Blue Cross and/or Blue Shield plans
had loss     ratios    that were below the minimum standard of 75
percent.
       After repeal of the Catastrophic         Coverage Act, the National
Association    of Insurance     Commissioners revised     its model
regulation    and minimum benefit      standards   for Medigap policies.
These revisions     include    several new consumer protection      provisions
designed to eliminate       certain   abusive sale and marketing     practices.
Also, policies    must now cover some expenses of policyholders            that
were not required      before,    such as all part B coinsurance     after the
beneficiary    pays the annual part B deductible        of $75.
Mr. Chairman           and Members of the Subcommittee:
       We are pleased                to be here today               to discuss          the work we have
done on Medigap              insurance             and recent       developments            related     to
Medigap.        As you requested,                     we will      be discussing            1990 Medigap
premium       increases,            the percentage               of premiums         paid    out as benefits
(the   loss        ratios)         in 1988,         and recent          changes      in federal        and state
regulatory          requirements             for      Medigap policies.


       The Medicare Catastrophic                          Coverage         Act    (MCCA), which         became
law in July          1988, provided                 for   the most significant                expansion           of
Medicare       benefits            since     the program's              beginning.          Beneficiary           out-
of-pocket       costs        for     covered          services      were to be capped,                and
additional          services         would have been covered                      when the        law was fully
implemented.
       In June and April                    1989, we testified               before      committees          of
both   houses        of the Congress                  on the     effects         of MCCA on benefits
provided      by the Medicare                 program       and Medigap             insurancel.         In both
instances,          we noted         that     MCCA expanded Medicare                   benefits        and thus
reduced      the     coverages             required       of Medigap policies.                 We pointed              out
that   a number of major                    benefits       provided         under     MCCA would        become
effective       in 1990,            and we expected              that      Medigap     premiums        for    1990




kee "MEDIGAP INSURANCE: Effects     of the Catastrophic     Coverage
Act of 1988 on Future Benefits",   Statement of Mr. Michael
Zimmerman before the Senate Committee on Finance (GAO/T-HRD-89-
22, June 1, 1989) and "MEDIGAP INSURANCE: Effects       of the
Catastrophic  Coverage Act of 1988 on Benefits     and Premiumsl',
Statement of Mr. Michael Zimmerman before the Subcommittee on
Commbrce, Consumer Protection,   and Competitiveness,    House
Committee on Energy and Commerce (GAO/T-HRD-89-13, Apr. 6, 1989).
would      be substantially              lower    than     they        would have been without
MCCA.
         In November 1989, the Congress                        passed          legislation            to repeal
MCCA and to restore               Medicare        benefits           to what they            were before            the
Act became effective.                    The repeal        legislation              reversed          the
reduction          in coverage         required     of Medigap                policies,        and we expected
this     would      result     in significantly              higher           Medigap premiums               than      if
MCCA had remained              in effect.
               DIGAP INSURANCE
AFTER REPEAL OF MCCA
         During      the debate          surrounding         the repeal             of MCCA, concerns
were raised           in the    Congress         about     the       effect       repeal       would        have on
Medigap      premiums        and how the          additional               premium increases                would
affect      low-income         elderly      persons.          We recently                 contacted         29
commercial         Medigap      insurers         to obtain           (1) their            estimate      of their
1990 premiums           and (2) their            reasons       for         premium changes.2
         Twenty      companies      responded          to our request                   and are listed           in
appendix      I to this         statement.          The policies                 sold      by these         20
companies         covered      about      2.6 million         policyholders,                 and they
estimate      their      1990 premiums will,                 on average,             be 19.5 percent
higher      than     premiums      in 1989.         The average                increase        is    $11.44      per
month.       The increases          range        from 5.0 percent                 to 51.6 percent,               and
one company reported               that     it    expected           its     1990 premium to be the



2See "MEDIGAP INSURANCE:                    Expected 1990 Premiums after Repeal of
the Medicare Catastrophic                   Coverage Act", Statement of Ms. Janet
Shikles  before the Senate                  Special Committee on Aging (GAO/T-HRD-
90-g*, Jan. 8, 1990).
                                                       2
same as its          1989 premium.                 Appendix       II     to this       statement                shows the
estimates          from the twenty              companies.
          The companies          attributed             about     half     of the           expected            premium
increases        to general            inflation         within        the medical            sector            of the
economy,        increased        use of health              services           by senior            citizens,           and
higher      than     expected          claims       experience           in prior           years.          The
companies        attributed            the other         half     of the        increase            to repeal           of
MCCA.       The companies              said     that     changes         required           by repeal            of MCCA
included:           (1) additions              to benefits,            such as coverage                    of the part
A deductible          or reducing              the policy         deductible           for         part     B
coinsurance         coverage           from $200 to $75, and (2) administrative
costs      associated         with      repeal         of the MCCA, such as modifications                                     to
policies        and notices            to policyholders.
          The Blue Cross and Blue Shield                          Association               also      surveyed          its
member organizations.                    Thirty-eight             organizations               responded,
representing          two-thirds           of the total            Blue Cross and Blue Shield
Medigap        enrollment.             After       summarizing           the    responses,                the
Association          found      that     the median             increase        in 1990 non-group
Medigap        insurance        premiums would be about                        29 percent.                 The
Association         said      that      a 9 percent             increase        was projected                   prior    to
repeal      of the MCCA. The Association                           said        that    plan         rate        increases
reflect        numerous       factors,          including         growth        in costs            and
utilization,          benefit          changes,         and adjustments               for     prior         rate
inadequacies.
          In addition              to concerns            about          increasing         premiums      for         Medigap
insurance,          another           area of congressional                        concern     has been the
percentage          of Medigap premiums                        returned           to policyholders              in the
form of benefits,                   or the policies'                     loss     ratios.      A loss        ratio       is
computed          by dividing            the total             incurred           claims3     for     a period          of
time     by earned           premiums           for     the     same.period.                The result          of this
computation           is usually            expressed              as a percentage.
         The Baucus amendment, which                               amended the Medicare                  law to
establish          federal          Medigap           standards,            set    federal     targets          for     loss
ratios      for     Medigap           policies.            The Baucus amendment required                               as a
condition          of approval            that         Medigap 'policies                be expected          to have
loss     ratios       of at ieast            75 percent               in the case of group                   policies
and at least           60 percent            in the case of individual                           policies.              MCCA
revised      the      Baucus amendment to require                                 states     to collect          data        on
actual      Medigap          loss      ratios.
         In an earlier                report4          and other            congressional            hearings5,          we
reported      on the           loss      ratios         of Medigap policies.                    Generally,              we
have reported               that      pre-1988          loss       ratios         of most commercial
policies      were below               the minimum standards.                           In contrast,          the pre-
1988 loss          ratios          of Blue Cross and Blue Shield                             plans     were generally

31ncurred claims include  actual                               payments            for claims plus reserves
for claims incurred  but not yet                               received            or processed by the
insurer.
4J4ediaar, Insurance: Law Has Increased    Protection  Aaainst
Sub tandard and Ovemriced   Policies    (GAO/HRD-87-8, Oct. 17,
198:).
5See * statements             cited       in footnote               2.
                                                               4
above the            standards.             For example,                 in our 1986 report,                 we reported
that        the     1984 average loss                ratio         for     individual          policies         sold      by 92
commercial             firms       was 60 percent;                 for     policies         sold     by 13 Blue
Cross        and Blue Shield                plans,      the average                was 81 percent.                Loss
ratio        data for 92 commercial                     policies              showed the           average      1987 loss
ratio        was 74 percent;                however,          that       average       was heavily             influenced
by the relatively                   large      block         of business            represented           by the
Prudential             Insurance           Company, whose loss                     ratio     was 83 percent.
Excluding            Prudential,            the other          commercial             policies        had an average
loss        ratio      of 59 percent.                For 75 Blue Cross and Blue Shield                                 plans,
the      1987 average loss                  ratio      on individual                plans      was 93 percent.
Because of changes                   in loss         ratio         reporting          requirements            discussed
below,         these        pre-1988        loss     ratios          cannot        be directly         compared with
more current                loss    ratio      data.
            State      insurance        regulators             caution          on the       interpretation               and
use of loss             ratio       data     because          a number of factors                    may affect           the
computations.                  For example,            early         policy        experience         may result            in
a relatively                low loss        ratio      because           policies          do not     cover       costs
related           to pre-existing              conditions             during        the policy's           waiting
period.             Also,      new policyholders                   may be relatively                 healthy       and
file        few claims,            so a policy          with         substantial            amounts of new
business            may experience             a relatively               low loss          ratio.        Thus,      loss
ratios        should         be viewed         over the time                that      represents          ttmatureU'
experience.                 For reporting            prior         to 1988,         the National           Association
of Insurance                Commissioners'             (NAIC) reporting                    form included           the
reporting            year's        experience          for     all       policies          in force       and a
        Y
                                                               5
cumulative         report              of the        3 most current              years'      experience.
Beginning         with         reports          covering            1988 and later,               the NAIC provides                a
two-tiered         set         of criteria              for       determining         if    loss         ratios      comply
with     loss     ratio          standards:6
         --       r policies                 that     have been in force                   3 years         or more,          the
                most recent                 year's      loss       ratio       must equal          or exceed the              60
                or 75 percent                  standard           (whichever         is applicable).
         --       r oolicies                 that     have been in force                   less         than      3 years,
              the policies                   must have a third-year                    expected            loss      ratio
              equal        to or greater                   than         the   60 or 75 percent                 standard.
         In connection                  with        work we have been doing                       for     two Committees
of the House of Representatives,                                    we have obtained                    1988 loss       ratio
data     (the     latest          available)               for     Medigap       insurance              from NAIC7 and
the     Blue Cross             and Blue Shield                    Association.             The data            are reported
in aggregate             for      all        policies            sold     by a company.             These aggregate
data    measure          a company's                 overall        performance            because         they      average
experience         across             all      policies.            This      means that           a company whose
aggregate         loss         ratio         is below the                standards     has one or more
policies        which          fail         to meet the minimum standards                           but may have
other      policies        that             meet or exceed the                  standards.               Conversely,          a

%n addition,      the NAIC has revised the formula for determining        the
incurred    claims portion     of the loss ratio.    Prior to 1988,
incurred    claims included     actual payments for claims plus reserves
for claims incurred      but not yet reported     to or processed by the
company plus a life-time        reserve for future   claims.    For loss
ratios   covering    1988 and later years, incurred      claims no longer
include   the life-time     reserves   in the computation.
7The NAIC labeled   its data "preliminary                                        results      onlyIll           and these
data are subject  to change.
company can have an aggregate                                           loss     ratio      above the              standards            but
offer         some policies                  that          fall         below them.
         The aggregate                      loss      ratios             by companies              for         policies         in force
more than          3 years             that          had more than                  $250,000             in earned          premiums
are summarized                  in appendix                   III.             Similar      data         for     policies         that
have been in force                          for      3 years             or less         are in appendix                  IV.
         As in our earlier                           report             and testimonies,                  many camp.any loss
ratios         are still              not meeting                    the minimum standards.                           In 1988,           the
loss     ratios          for         companies              with         policies          in force             more than         3 years
were based on total                          earned           premiums             of approximately                   $3.7 billion.
For policies              sold         to individuals:
         --     By commercial                      insurers,              34 percent          of the             company loss
                ratios          were below the                          60 percent         minimum standard.                           The
                average              loss         ratios          for     companies          exceeding              the     standard
                was 68.5 percent                       while             the     average      for         companies          below the
                standard              was 50 percent.
         --     Among the              Blue Cross and Blue Shield                                   plans,          98 percent                met
                or exceeded                  the target                  loss      ratio     percentage.                  The average
                loss      ratio             for     these            plans       was 93.4 percent:                    the       loss     ratio
                of the          single             plan       that        fell      below the             standard          was 53.9
                percent.
For group          coverage:
         --     About          66 percent                 of the commercial                   company loss                  ratios            were
                below      the         75 percent                  minimum standard.                       The average                 loss
                ratio          for     companies                  that       were at or above the target                                was
                     101.5      percent,          and the average                   for     those      below       the target
                     was 62.6 percent.
             --      Among the Blue Cross and Blue Shield                                      plans,      24 percent               had
                     loss     ratios       that     fell        below the minimum target.                               The
                     average       loss     for     plans          that      met or exceeded               the target            was
                     94.1 percent,           and the average                      for      those      below the target
                     was 71.5 percent.
             Earned premiums                for     policies               in force         3 years       or less         totaled
approximately                   $3.5 billion              for      1988.          For policies            sold      to
individuals:
             --      By commercial           insurers,               60 percent             of the      company loss
                     ratios      were below the                 60 percent              minimum standard.
             --    Among the           Blue Cross and Blue Shield                              plans,      all      met or
                     exceeded       the     standard.
For group              coverage,           about     71 percent                  of the      commercial            companies
and 16 percent                   of the      Blue Cross and Blue Shield                                plans      did     not meet
the      75 percent              target.           Additional              details          are in appendix               IV.
             Under the           Baucus amendment,                      states       are responsible                for
monitoring               whether       Medigap policies                      meet the          loss     ratio       standards
and for            taking        action      when they              do not.             In the past,             states       did
little            to assure        that      the     loss          ratio         targets      were actually               met.
This         was because           the      loss     ratio          standards             were expressed             as targets
and the manner in which                            loss      ratio         data were reported                    by insurers
did      not       facilitate          monitoring.                  Under the              revised      federal          and NAIC
loss         ratio       standards,          loss         ratios         must meet the                standards          after      3
years         and the           form in which              loss         ratios       are reported           will         make such
         Y
                                                                    8
determinations               easier        than      in the past.                 When states              adopt      the new
standards,            they    should        be better              able    to enforce             the      standards          than
was the         case previously.
      GUTATORYREQDIREMENTSFOR MEDIGAP

         Over the years,               another             congressional                concern      related          to
Medigap         has been marketing                   abuses and consumer protections                                  against
those         abuses.        NAIC's      most recent                revision            to its     model
regulations,             adopted       in early             December 1989,                 included         several          new
consumer         protection           provisions             along        with         changes     to the minimum
standards         which       were needed because                     of MCCA's repeal.                      These new
standards         will       be the criteria                 for     approval            of state         regulatory
programs         under       the    Baucus amendment and are now before                                      the      states
for     their     consideration               and adoption.                 The new NAIC standards
continue         efforts,          which      began with             the passage             of the         Baucus
amendment,            to eliminate            abuses         in the        sale         and marketing           of Medigap
insurance.              We believe          that      if     adopted        and enforced                by the        states,
they     will     help       prevent        abuses in the                 sale         of Medigap         policies.
         One problem           in the         sale         of Medigap            insurance         that      has been
identified            over    the years            is that          some Medicare                beneficiaries
purchase         multiple          policies         that      duplicate                coverage.          Revised
consumer         protection           provisions             in the NAIC model should                         help
alleviate         this       problem.          Application                forms will             include      questions
asking         whether       the    applicant              has another            Medigap         policy       in force
and,     if     so,     is the policy              being      applied            for     intended         to replace
any medical             or health        insurance            already            in force.           Agents        must
also,list         on the       application                 any health            insurance         policies           they
                                                              9
have sold           to the       applicant.              The sale                of more than            one Medigap
policy       to an individual                   is prohibited,                    unless       the combined
policies'           coverages         do not exceed 100% of the                                individual's                actual
medical        expenses.             In addition,               if         the     sale     involves         replacement
of a Medigap               policy,       an insurer             or its            agent       must provide              the
applicant           with      a notice          before     the replacement                      policy           goes into
effect       that      the     coverage          applied             for     replaces          health        insurance               in
force.         This        notice     will       give     purchasers                 an additional                opportunity
to review           their      coverage          and to cancel                    the new policy                 without
penalty        if     they     decide        not to replace                      a policy       already           in force.
          Another          problem       with     Medigap marketing                        has been frequent
replacement            of policies              which     results                in new waiting              periods           for
pre-existing               conditions.            New provisions                     should       decrease             the
incentives            to sell        new policies               by placing                restrictions             on the way
commissions            are paid          and prohibiting                     waiting          periods        when
replacement            policies          are sold.              The compensation                   provision             limits
the      first-year          commission           and other                 compensation8             that        may be paid
to an agent            selling        a Medigap policy                       and also          requires           companies               to
spread       the total           compensation             for         selling          a policy          over      a
reasonable            number of years.                   These requirements                      will        prevent
companies           from loading             agent       compensation                  into     the      first         years         a
policy       is     in effect,           thus     decreasing                 the     incentive           to sell
replacement            policies.             Also,       when issuing                  a replacement               Medigap
policy       insurers          must waive            waiting           periods            applicable             to pre-


8Compensation includes                       bonuses, gifts,  prizes,                           awards,           finders
fees{ and other similar                       forms of remuneration.
                                                            10
existing     conditions         or other       similar          restrictions                 to the        extent
such time        was spent      under    the original             policy.
       In addition         to the consumer protection                       provisions,                   the new
NAIC model regulation               modified       some minimum benefit                        standards                 for
Medigap    policies        from those       required            before      MCCA was enacted.                                For
example:
           For services          covered       under      Dart         A of Medicare.                     Current
           NAIC standards            require     Medigap          policies             to cover            either
           all     or none of the part             A deductible                ($592 per benefit
           period        in 1990).       The NAIC standard                  in effect                before         MCCA
           did     not    contain     a minimum requirement                      for         coverage             of the
           part     A deductible,          and thus         a policy           could          have covered
           just     a portion        of that     deductible.
           For services          covered       under      part         B of Medicare.                     NAIC's
           current        standards      require         Medigap         policies             to cover             all
           policyholders'            coinsurance          for     services             covered            by part              B
           of Medicare,          after     the policyholder                 has paid            the part                 B
           deductible        of $75 per year.                   This     coinsurance                 is    20
           percent       of the Medicare-approved                       charge         for     services.
           Prior      to the MCCA, the NAIC standards                            required             Medigap
           policies        to pay part         B coinsurance               after        the policyholder
           paid      $200 (the       $75 annual          part     B deductible                 plus        $125 in
           part     B coinsurance),            and Medigap              policies             could        limit
           coverage        to $5,000       in benefits            in any calendar                     year.
      Mr. Chairman,          this     concludes         my prepared              remarks.                 I will          be
happy to answer any questions                   you have.
    u
                                                   11
APPENDIX I                                                     APPENDIX I

JNSURANCE COMP&.&LES
                   THAT RESPONDEDTO OUR REQUEST FOR DATA
     Prudential    Insurance    Company of America
     United American Insurance
     Bankers Life
     Mutual of Omaha
     Union Fidelity     Life Insurance     Company
     National Home Life Assurance Company
     Union Bankers Insurance       Company
     Standard Life and Accident        Insurance   Company
     The Principal     Mutual Life Insurance      Company
     Pioneer Life Insurance       Company of Illinois
     Pyramid Life Insurance       Company
     Associated    Doctors Health and Life Insurance       Company
     Colonial    Penn Franklin
     State Farm Mutual Auto Insurance         Company
     Continental    Casualty Company
     American Integrity      Insurance    Company
     New York Life Insurance       Company
     Provident    Companies
     American Republic
     Atlantic    American Life Insurance      Company
APPENDIX II                                  APPENDIX II



                               1990
                   1989   expected
               monthly     monthly         Increase
 Comnqnv       premium     premium    lwrcentaael
Company   AA    $50.00      $50.00               0.0
Company   AB     83.09       87.26               5.0
Company   AC     59.93       65.32               9.0
Company   AD     73.96       81.29               9.9
Company   AE     73.46       80.79              10.0
Company   AF     61.65       70.15              13.8
Company   AG     68.00       78.00              14.7
Company   AH     81.00       94.00              16.0
Company   AI     39.25       45.95              17.1
Company   AJ     58.75       70.39              19.8
Company   AK     68.00       81.52              19.9
Company   AL     33.90       41.00              20.9
Company   AM     57.65       70.33              22.0
Company   AN     38.00       46.36              22.0
Company   A0     43.29       53.68              24.0
Company   AP     90.00      115.00              27.8
Company   AQ     50.82       67.59              33.0
Company   AR     43.84       59.67              36.1
Company   AS     62.82       90.93              44.7
Company   AT     32.95       49.95              51.6
Average         $58.52      $69.96              19.5
APPENDIX III                                                       APPENDIX III



                                 ial              Blue Cross/Rbue Shield
                  Above 60% Belaw 60%          Above 60% Below 60%

-mu-
 (rnillicms)       $690        $101     $791    $1,887      $.53   $1,888
Avg. liss Ratio    68.5        50.0     66.1     93.4       53.9     93.4

                          Cmnercial              Blue Cross/Blue Shield
               Above 75% Belcrw 75%        Above 75% Below 75%
GXUW            Tamei=              Total,  Tamet     Tamet    Total
--                 10     =Y!F        29       26         8      34
EarnedPreaniums
   (millions)    $600       $49     $649     $361       $48    $409
Avg. Loss Ratio 101.5      62.6     98.5     94.1      71.5    91.4




                                        3
                                                             .,s,          ,                             .   .   . .   I   .I




A P P E N D IX IV                                                                           A P P E N D IX IV



                                                                        B lue Cross/Blue S h ield
                    A b w e 6 0 % B e lw 6 0 %                  A b o v e 6 0 % B e lw 6 0 %
oaapuules            =zF           T              ?iv=e-                          =F           99
EarnedPremiums
  (millions)          $650             $616     $ 1 ,2 6 6          $ 1 ,2 1 5         -    $ 1 ,2 1 5
A v g . Loss R a tio 6 6 .7            5 1 .4      5 9 .3              8 7 .5          -       8 7 .5

                              C !mnexvial                               B lue Cross/Blue S h ield
                   A b o v e 7 5 % B e lw 7 5 %                A kuve 7 5 % B e lw 7 5 %
                                    Tarrret     3a$             Tarcret      !iiB m e z  T o tal
campanies           T                    15                        16              3        19
Earnedpremiurrrs
  (millions)          $616              $48     $664                  $364          $13        $377
A vg. I.oss R a tio 9 9 .9            5 5 .8    9 6 .7                9 2 .6       6 7 .3      9 1 .7