oversight

Medigap Insurance: Proposals for Regulatory Changes and 1988 Loss Ratio Data

Published by the Government Accountability Office on 1990-06-07.

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

                 United States General Accounting   Office
                 Testimony




For Release       MEDIGAP INSURANCE:
on Delivery       Proposals  for Regulatory
Expected at       Changes And 1988 Loss Ratio           Data
1O:OO a.m. EDT
Thursday
June 7, 1990




                  Statement  of
                  Janet L. Shikles,  Director
                  Health Financing  and Policy          Issues
                  Human Resources Division
                  Before the
                  Subcommittee  on Commerce, Consumer
                    Protection,   and Competitiveness
                  and the Subcommittee     on Health and
                    the Environment
                  Committee on Energy and Commerce
                  House of Representatives




                              l                                  GAO Form 160 ( I2 ‘87)
       Medicare   supplemental   (Medigap)  insurance      is private
insurance    designed   to cover Medicare's    deductibles       and
coinsurance.      This insurance   has been available        almost from               the
beginning    of Medicare.
         In response to marketing           abuses, the Congress added section
1882 to the Social          Security    Act in 1980.       This section,    commonly
referred     to as the Baucus amendment, established                federal  minimum
benefit     standards     for Medigap insurance         and established     federal
criteria      for state     insurance     regulatory    programs.      The Baucus
amendment retains         the traditional        role of the states      as primary
regulators       of insurance      if the states      adopt requirements      at least
as stringent       as those contained         in a model adopted by the National
Association       of Insurance       Commissioners     (NAIC).
       Congress is concerned  that the consumers of Medigap insurance
are protected.     Reports of abuses in the marketing of Medigap
insurance    have continued.
         H. R. 4840 would expand consumer protections                     for the elderly
who purchase Medigap insurance.                   These include       reducing      the
combinations         of benefits      that insurers        may offer,     raising      the loss
ratio     standards,      and encouraging         states    to implement       counseling
programs to aid consumers in making choices                     on what coverage to
buy.      H. R. 4840 also contains             provisions     suspending       policy
premiums and benefits             during    times that a policyholder             is alsa
eligible      for Medicaid,        strengthening        the prohibition        on selling
policies      that duplicate         coverage that the purchaser             already      has,
requiring       state approval        of rates,      and guaranteeing        renewability
and conversion         privileges       for policyholders.
       GAO believes    that the enactment    of the protections     contained
in H. R. 4840 would go a long way toward improving            consumer
protections     for purchasers  of Medigap insurance      and will   also
improve the economic value of this        insurance.
        The 1988 loss ratios       of 34 percent    of the commercial
companies with over $250,000 in earned premiums from individual
policies    in force for 3 years or more 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.      H. R. 4840 would raise the minimum loss ratio
requirement     from 60 percent      and 75 percent      for individual       and
group policies       to 70 percent     and 80 percent,      respectively.
Mr.     Chairmen       and Members               of the     Subcommittee:
         We are       pleased         to be here           today      to discuss                your      concerns           with
the     marketing         and performance                 of Medicare                supplemental               (Medigap)

insurance,           concerns         that       are     addressed          in H. R. 4840,                 the      proposed

"Medigap      Fraud          and Abuse Prevention                    Act        of     1990."          Enactment            of H.
R. 4840 will           go a long             way toward            improving             consumer         protections
for     purchasers           of this         insurance        and will               also      improve       the        economic
value      of this          insurance.            This     legislation                 includes          many features
that     we suggested               the    Congress        consider.                 My testimony            today          will
focus      on the      main points               of the      proposed            bill,         and we have an
additional           item     for     your       consideration.
THE MEDICARE PROGRAMAND MEDIGAP INSURANCE
         Medicare         provides           coverage        for     a broad             range        of health
senrices       for     most people               65 years          of age or older                    and some
disabled      persons.               The program           has two parts.                      Part      A, hospital
insurance,           covers         inpatient          hospital,          skilled             nursing       facility,
hospice,       and home health                   care.       Part      B, supplementary                     medical
insurance,           covers         many types           of noninstitutional                      services,             such as
physicians,           clinical            laboratory,         X-ray,            and physical              therapy
services.            Both     parts        require        beneficiaries                  to    share      in the         cost
of their       care         through        deductibles             and coinsurance.
         Almost       from       Medicare's            beginning           in        1966,     private          insurance
companies         have offered               Medigap       policies             to cover          some of the               out-
of-pocket         costs        incurred          by Medicare           beneficiaries.                     Policies            may

also     provide       benefits            for    services          not     covered            by Medicare.
Because       of abuses             identified           in marketing                 Medigap         policies,          the
Congress       in     1980 added section                    1882 to the                Medicare          law.        This
section,       commonly              known as the               Baucus           amendment,             sets     forth
requirements              that       must be met before                      a policy            can be marketed                  as
Medigap       insurance.                   The Baucus amendment                         incorporated             model
Medigap       regulations                  adopted       by the           National          Association              of
Insurance          Commissioners                   (NAIC)       as federal               standards.              The Baucus
amendment          retained            the     traditional                role     of the          states        as the
regulators           of     insurance,               as long       as they              have regulatory               standards
at   least     as stringent                   as the          federal        requirements.
          The NAIC's              most recent            revision            to    its      model        regulations,
adopted       in early             December            1989,      included              several         new consumer
protection           provisions.                   In the       Medicare           Catastrophic                 Coverage
Repeal       Act     of     1989,          these       new standards               were      incorporated                 into      the
Baucus amendment                   as the          criteria         for      approval             of    state     regulatory
programs       and are             now before            the      states          for     their         consideration               and
adoption.            Some of the               consumer           safeguards              of H. R. 4840 are
similar       to those              in the         NAIC's       consumer           protection              amendments.
Because       states          are      expected          to adopt            the        NAIC's         consumer       protection
amendments           to obtain               federal          approval           of their          regulatory             programs,
I will       point         out      the      major      similarities               and differences                   between           the
provisions           of H. R. 4840 and the                         NAIC's          consumer             protection
amendments.
ECONOMIC VALUE OF POLICIES
AS MEASURED BY LOSS RATIOS
          The Congress               has been concerned                      about         the     portion        of Medigap
premiums           returned          to policyholders                     in the         form      of benefits,              or the
policies'           loss         ratios.           A loss        ratio       is computed                by dividing              total


                                                                  2
incurred        claims1           by total              earned          premiums          for         the      same period.                 The
result        of this         computation                is usually                expressed            as a percentage.
          The Baucus           amendment                set      loss       ratio       targets              for      Medigap
policies.            Those targets                  were established                      as expected                   loss      ratios
for      Medigap       policies            --     at least              75 percent              for     group          policies            and
at    least     60 percent                for      individual               policies.
          H. R. 4840 would                      increase          these         targets           to    80 percent                for
group       policies          and 70 percent                     for       policies          sold       to         individuals.
In earlier           testimony,                 we suggested                that      the       Congress              consider
raising        the     loss       ratio          targets.
          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                 above         the      standards.                 For example,                     in our
1986 report,               we said         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.
          Some caution              is needed                 in 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

'Incurred  claims   include                         actual             payments         for claims plus reserves
for claims incurred     but                        not yet             received         or processed  by the
insurer.
                                                                       3
file       few claims,                   so a policy             with           substantial              amounts          of new
business           may experience                    a relatively                    low loss            ratio.           Thus,          a
policy's            loss         ratio      should             be viewed             over     the        time      that         represents

"mature"            experience.
           For years              prior       to     1988,            the       NAIC form              used by insurers                      to
report           Medigap          loss      ratio             data     included             the        reporting          year's
experience                for     all      policies             in     force         and a 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:
           --     For 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).
           --     For policies                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.
Because           of the          changes           in        loss     ratio         reporting             requirements,                     pre-
1988 loss            ratios              cannot      be directly                   compared             with      more current                    loss
ratio           information.2




21n 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.
                                                                            4
         We have obtained                          1988 loss         ratio          data      (the        latest        available)
for     Medigap              insurance             from     NAIC3 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 company can have
an aggregate                  loss     ratio         above the               standards            but     have       some policies
that     fall          below         them.
         The aggregate                      loss      ratios        by companies                  for     policies         in        force
3 years           or more with                more than             $250,000            in earned               premiums            are
summarized               in appendices                    I and II.            Many company loss                       ratios          are
still       not        meeting         the         minimum standards.                       In      1988,        the    loss         ratios

for     companies              with         policies           in force             3 years         or more 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      ratio         for    companies              exceeding             the    standard
                  was 68.5            percent             while     the       average         for        companies            below         the
                  standard            was 50 percent.                        About      88 percent                 of total          earned




3The NAIC labeled                       its data             "preliminary               results           only,"         and        these
data are subject                      to change.
                                                                         5
          premiums            was with              companies               whose average                 loss         ratio
            exceeded          the          minimum standard.
     --   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.            Over 99 percent                          of total         earned          premiums               was with
            plans      whose average                       loss     ratio           exceeded        the         minimum
            standard.
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.                  About       93 percent                of total           earned
            premiums           was with             plans          whose average                 loss          ratio      exceeded
            the      minimum          standard.
     --     Among the           Blue          Cross             and Blue         Shield         plans,          24 percent                had
            loss      ratios          that         fell          below      the      minimum target.                      The
            average           loss         ratio          for     plans      that      met or exceeded                         the
            target       was 91.4              percent,              and the          average            for      those          below
            the      target          was 71.5              percent.              About     88 percent                  of total
            earned       premiums              was with              plans          whose average                 loss         ratio
            exceeded           the         minimum standard.




                                                                    6
          Earned         premiums             for     policies             in      force         less       than      3 years
totaled          approximately                    $3.5   billion             for         1988.            Details        on the        loss
ratios          of these            policies          are     in appendices                      III      and IV.
          If     H. R. 4840 were to become'law,                                          the     loss       ratio       targets
would          be raised            to     70 percent            for       policies              sold       to      individuals         and
80 percent              for        group      policies.4                 In appendices                    V and VI,            we have
grouped          the     policies             as if       the      higher           loss         ratio       targets           had been
in effect           in        1988.         For companies                  whose policies                    had been in              force
for      3 years         or more:
          --     37 percent                of commercial                 company loss                    ratios       on policies
                 sold         to    individuals             would          meet the              70 percent             target,        and
                 these         policies             would     account              for         about      21 percent            of total
                 earned            premiums.
          se 92 percent                    of the        Blue      Cross           and Blue              Shield        plans        would
                 meet the             higher         target        for       their             individual            business,         and
                 these         policies             would       account            for         about      96 percent            of total
                 earned            premiums.
          --     28 percent                of commercial                 company loss                    ratios        on group
                 policies             would         meet the           80 percent                 target,           and these
                 policies             would         account        for          about          89 percent            of total
                 earned            premiums.
          --      68 percent               of the        Blue      Cross           and Blue              Shield        plans        would
                 meet the                higher      target        for          group          business,            and these




4The bill            would also apply these                                loss ratio   requirements                           to
hospital           indemnity   and specified                               disease policies.
                                                                       7
                policies          would       account          for         about      81 percent                 of total
                earned          premiums.
Raising         the      loss     ratio       requirements                  would         increase              the     economic
value      of Medigap             policies,          and we support                       an increase                  in those
requirements.
         The Baucus              amendment          requires               that     policies              be exoected              to
meet the          loss     ratios          stated       in the             provision.                 In effect,               as long
as the         insurer          estimates        that       a policy               will        meet the               standard,          it
has complied              with      the     requirement               whether             or        not   its         actual      loss
ratio      ever        meets      the     minimum standard.                         The NAIC model                      regulation
requires          that     policies           in effect              for      3 years               or more actually                 meet
the     loss      ratio         standard.           H. R. 4840 also                       requires              insurers          to meet
the     loss      ratio         standards        and specifies                     that        if      they      do not,          refunds
must be made to policyholders.                                  These provisions                          would         put     teeth         in
the     loss      ratio         requirements,            and we support                        their          enactment.
PROPOSED CONSUMERPROTECTION PROVISIONS
          Over the          years,         the   Congress             has been concerned                              about     reports
of continuing               abuses         in the       sale         of Medigap                insurance               to the
elderly.              We issued           a report       in      19865 and testified                             earlier          this

year6      on some the              problems         that        have been identified                                 in the
marketing             of Medigap           insurance           and described                        proposals            to curb

5Mediaao Insurance:     Law Has Increased    Protection                                                       Aaainst
Substandard  and Overoriced   Policies    (GAO/HRD-87-8,                                                       Oct. 17,           1986).
6See "MEDIGAP INSURANCE: Premiums and Regulatory       Changes After
Repeal of the Medicare Catastrophic    Coverage Act and 1988 Loss
Ratio Data",  Statement  of Ms. Janet Shikles   before   the
Subcommittee  on Health,  House Committee on Ways and Means (GAO/T-
HRD-90-16).

                                                                 8
some of those            abuses.               H. R. 4840 addresses                                many of those
concerns.
Susoendina          nolicies            for     Medicaid                 beneficiaries
        A provision             of H. R. 4840 would                                suspend            the     premiums               and
benefits       of a Medigap                   policy          for        any period                of time          that         a
policyholder            is     eligible              for      benefits                  under      Medicaid.                A Medicare
beneficiary            who is        also        eligible                for       Medicaid            does not             need a
Medigap       policy          because          Medicaid                will        cover         the    beneficiary's
deductibles            and coinsurance.                           This         proposal            could       be an important
safeguard        for     Medicare              beneficiaries                       who become eligible                           for
Medicaid       because          they          would         not        have to continue                       to pay premiums                       on
their      Medigap       policies              while          receiving                  Medicaid           benefits.                  These
persons       would      be entitled                   to reactivate                      their        Medigap             policy          within
90 days of no longer                      being            eligible               for     Medicaid.                We support                this
provision        of the         bill.
Duolication            of coveraue
          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.              Since           the

Baucus       amendment was enacted,                               it        has been illegal                    for        an agent            to
knowingly        sell         duplicative                  Medigap             policies            to an individual,                          but
many state          regulators                have told                 us that            it     is difficult                to prove
that      an agent           knowingly           violated                   the    law.           H. R. 4840 would                      add a
requirement            that      sellers             obtain             a written               statement             listing           the
other      health       policies              that         prospective                   clients            have      in    force            and
stating       whether          the      individual                     purchasing               the    insurance                is

                                                                        9
qualified              for     Medicaid.                       The bill            would          require          this      statement              to
be on a form                  that         (1)         tells         the     applicant               that         a Medicare
beneficiary                  does not                 need more than                      one Medigap              policy,          (2)     tells
the     applicant              that            he or she may be eligible                                    for     Medicaid           and
that,       if     so,        the         Mediqap              policy        will          be suspended                 during        the        time
the     individual                  is     covered                 by Medicaid,                  and (3)          gives      the      name,
address,           and telephone                         numbers            of the           state         Medicaid          office          and
counseling              program,                 if      the        state         has a counseling                      program.
          H. R. 4840 has a strict                                       definition                of duplicative                   coverage,
prohibiting                  the     sale             of more than                 one Medigap                  policy       to     a Medicare
beneficiary.                   The bill                  also        extends              this      prohibition              on
duplication                  to other                 policies             sold      to Medicare                  beneficiaries,                  such
as hospital                  indemnity,                  specified                disease,           and policies                  primarily
covering            long-term                  care          expenses.               If      an applicant                 already          has a
policy           but     indicates                    that         he or she intends                       to cancel          that         policy
when the           new one becomes effective,                                             the     seller          may take          the
individual's                  application                      without            violating               the     prohibition               on
selling           duplicate                policies.
          The NAIC's                     consumer              protection                 amendments              also     require           agents
to attempt               to        find        out what              coverage              a prospective                  client          has
before           selling            someone a Medigap                             policy.            The NAICls              provisions,

which       apply            only         to Medigap                 policies,                  require         agents,       when they
determine              that         an applicant                      is replacing                  an in-force              Medigap
policy,           to give                the     applicant                 a form,              advising          the     applicant              that
he or she should                          review             all     existing               coverage            before       deciding             to
terminate              existing                coverage.                   The NAIC consumer                       protection

                                                                             10
amendments          would         allow     the         sale     of more than              one Medigap             policy        if
the     combined       coverage            under         the     Medigap         policy       and other            health
coverage         already          in    force       would        cover      no more than             100% of the
policyholder's              actual         medical             expenses.
          The provisions               of H. R. 4840 would                       provide        greater          protection
of consumers'              interests             than     the     NAIC standards,                and we support
those      stronger         requirements.
Renlacement           of coveraue
          Another      problem            with      Mediqap           marketing           has been frequent
replacement           of policies.                  Unnecessary             replacement             of policies
could      harm consumers'                 interests             because         policies        often       have
waiting      periods          for       pre-existing              conditions.                Insurance           agents         had
an incentive           to     sell        replacement             policies          because         the     sale
commission           structure            gave much higher                  remuneration             for     the        first
year      a policy       was in effect                   than      for    renewal          years.          The
provisions           in H. R. 4840 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 bill          would        limit         the     first-year           commission            and other
compensation7              that        may be paid              to an agent           selling        a Mediqap              policy
to     150 percent          of the         commission              and other          compensation               for
servicing         or selling              the      policy        in a second              or subsequent                year.
Also,      the    commission              or compensation                  for     selling       a replacement
policy       cannot        exceed         the      compensation             that      would      apply       to the


7Compensation  includes                      bonuses, gifts,  prizes,                         awards,        finders
fees, and other similar                       forms of remuneration.
                                                                 11
renewal           of an existing               policy.             These commission                   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.             Finally,            when issuing              a replacement                     Mediqap
policy       that        had been in effect                    for        6 months          or longer,              insurers
must waive            waiting          periods         applicable                to pre-existing                  conditions                   or
other       similar           restrictions             to the           extent       such time              was spent               under
the      policy       being          replaced.
          The NAIC consumer                    protection               amendments            contain            similar
provisions,              except        that      under        NAIC's        rules          first-year             commissions
will      be limited             to    200 percent             of the            commission           for        the     second           and
subsequent            years.           Limiting            first-year              commissions              to    150 percent
of subsequent                 year     commissions             would         lessen         the      incentive                for
agents       to unnecessarily                    replace           policies.              We support              the         stricter
limit       in H. R. 4840 and the                          other        proposals           regarding             replacement
of coverage.
Policy       simnlification
          H. R. 4840 requires                        the    NAIC,         within      9 months              of enactment                      of

the      legislation,                to promulgate              simplification                    standards             for
Medigap           policies.             If    the     NAIC does not                 act     within          the        time
allowed,           the     Secretary           of Health             and Human Services                      shall
promulgate            such standards.                      These        simplification                  standards              must
limit       the      combinations              of benefits                that      may be offered                     in Mediqap
policies           and prescribe               uniform          language            and format              for        describing
benefits           in policies.                The simplification                         standards          must         include              a

core       group         of benefits,               standard         to    all      policies,            which          include

                                                                   12
only      the       minimum benefits                      required             under      the       NAICls         model
regulation.                  If     a company offers                        a policy         that       covers           more than
the     core        group          of benefits,                it     must also           offer         a policy              that
covers         only       the       core        group.              Also,      companies            that       offer          policies
with      benefits                in addition             to the            core     group       will         be limited              to the
approved            benefit             combinations.                      For each policy                 that        includes
benefits            in addition                 to the         core         group,       the     premium           for        the
additional             benefits              must be separately                        stated.
          Under        the         current          Baucus amendment,                     Medigap             policies           must
meet minimum benefit                            levels,             but     companies           can offer            any
combination               of benefits                in addition                   to the       minimums.                This        makes
it     difficult             for        consumers          to comparison                  shop for             the       best        price,
because            policies             .offered       by two different                       companies            may have
different             benefit             structures                as well         as different               premiums.                  We
suggested             that         Congress          consider               a requirement               for       standardized                 or
simplified             policies              in earlier                testimony          because             we believe              this
change         would         .make it           easier         for         consumers          to comparison                   shop among
companies             on the            basis       of price               and service,             knowing            that         the
products            are      comparable.                  Simplifying                policy         options            is not         a new
idea.           Massachusetts,                     Minnesota,               and Wisconsin               require           Mediqap
insurance             issued            in those          states            to offer           standard           combinations                 of
benefits.
          H. R. 4840 should                         not    limit            consumer           choice         to any great
extent          because            it     allows       up to              10 different            combinations                  of
benefit            packages             in the       initial               simplification               standards.                   Also,

the      proposed             law allows             the       Secretary             to waive           the       standards               to

                                                                          13
enable          testing          of new benefit                combinations.                    The proposed                law
would      allow          for     the    addition           of up to          three        additional
combinations                   of benefits         based         on the       results            of     such tests.
          We support              the    intent         of H. R. 4840 to                   simplify             the      policies
and improve               the     consumers'            ability           to comparison                 shop for          coverage.
Consumer             counselinq
          H. R. 4840 would                     establish           a grant          program           that      would        assist
states          to    establish          counseling              programs           to    aid     individuals                in
comparing             and choosing              Medigap          policies.               This     grant         program           would
require          matching            funds      from     the       states.
          In connection                 with      on-going          work      on Medigap                insurance,            we
recently             visited         12 states          to obtain            information                about       their
insurance               regulatory           program.             Four     of those             states       had some type
of consumer               counseling            service,           relying          on insurance                department             or
office          of aging           employees,           or volunteers,                   to help         the       elderly
assess          their          Medigap       needs      and the           options         available.
          In our          earlier        report         on Medigap            insurance,                we identified                 many
of the          complexities              involved            in purchasing               a Medigap             policy.
Counseling               programs        would         help       the     elderly         understand               the      options
available.
Rate      annroval
          H. R. 4840 requires                      state          approval          of rate            increases,
including               public       notice       and a public               hearing            before         approving
increases               that     exceed        twice       the     rate      of     increase             in the        medical
component               of the       consumer          price       index      since         the        effective            date      of

the      last        rate.         The proposal               permits        states         to        operate         an approval

                                                                   14
process             whereby            proposed            rates          may be deemed approved                               if     they            are
not     disapproved                    within           90 days of the                    company's               filing.
         According                    to the         NAIC,        14 states8                  require          that         rate      changes
be approved                before             they       go into           effect.               In another                 29 states,
rates     must be filed                         with       the       state         for        a specified                period            of time
before         they        go into              effect:           rates          may be put               into        effect              in these
states         if     they            are     not       disapproved                by the          state          within            the
specified             waiting                time.         In the          remaining               11 states,                rates              may
become effective                         when they              are       filed          with      the      state,           or      insurers
are     not         required             to     file       rates          with      the         state.
         Enactment                    of this           premium           approval              requirement                 would          provide
some assurance                        that      states           review           company justifications                                  for     rate
increases,              but           this      may also             require             at     least       some states                    to hire
additional              personnel                or to           shift          personnel               from      rate       reviews              of
other         lines         of        insurance            to Medigap               rate         reviews.                We are            not

aware     of research                        showing         that         rate      approval              will        help          control
premium             increases                or assure            that'loss               ratio          requirements                     are met.
However,             the     process                 in H. R. 4840 would                         provide           more opportunity
for     public             involvement                  in the           rate      approval              process.
Renewability                  and conversion                      standards
          H. R. 4840 would                             require           that      Medigap              policies            be guaranteed
renewable,                 and the            bill        contains              conversion               privileges                 in case a
group         policy             is     replaced           or if          a policyholder                       leaves        the          group.
Similar             provisions                are part             of NAIC's                  consumer           protection


8The term states                            includes           the      50 states,    the District                             of Columbia,
and the territories,                                 a total          of 54 jurisdictions.
                                                                           15
amendments.              These          could         be important                  safeguards                 for     consumers,
and'we       support           this      provision                 of the         bill.
CONGRESS MAY WANT STATES TO REVIEW
MEDIGAP ADVERTISING MATERIALS
          In addition             to the          proposals                contained               in H. R. 4840,                     we have
an additional              suggestion                 for      the        Subcommittees                   to     consider.             As in
the     case of         rate      reviews,             states             have varying               advertising                     review
authority.g              The NAIC says that                           most states                  are        file     and use
jurisdictions.                  Of the           12 states                we visited,               1 was a prior
approval         state         and 11 were                  file      and use states.                          Under         current
federal         law,     insurers              are      required             to     follow          state            law regarding
submission             of their          advertising                  materials              for     state            review.
          H. R. 4840 would                     require             that      information                  describing                 policy
benefits         be in uniform                   language             and in a format                         approved             by the
state      to    facilitate              comparison                  shopping.            Also,               the     bill
establishes             penalties              for      anyone            who mails           advertising                     or
soliciting             material           into        a state             where       a Mediqap                 policy         has not
been approved              for         sale.          While          these        provisions                  would          improve
protections             available,               the        Congress          may wish              to require                 all      states
to    subject          advertising               material             to some level                      of     review         before         it
may be used.               Requiring                 prior         review         of advertising                      material           would
make advertising                      review         consistent              across          the         states          and would            help

gThere are three basic types of review authority.                    Under prior
approval    authority,       insurers   are required    to submit their
advertising     for review and may use it after            receiving     approval
from the state.         Under file     and use authority,      insurers    must
submit their      advertising       and may use it if it is not disapproved
within    a stated     period    of time.    Under use and file       authority,
insurers    may begin using their          advertising    at the same time they
submit it for state approval.
                                                                      16
assure     that     the      elderly    are     not   exposed     to deceptive      or misleading
Mediqap        advertising         materials.
         Mr.    Chairman,        this    concludes         my prepared   remarks.      I will   be
happy     to answer          any questions        you'have.




                                                      17
APPENDIX I                                                                     APPENDIX I


               DISTRIBUTION OF 1988 MEDIGAP LOSS RATIOS
       FOR POLICIES THAT HAVE BEEN IN FORCE FOR 3 YEARS OR MORE
For policies  sold to individuals,
with more than $250,000 in earned                   premiums
Commercial    plans
                    Number of            Earned                       Average
Loss ratios         companies       premiums (0001             loss    ratio  (%I
Under 40%                  4                 $    7,666                31.8
40 - 49%                 12                      40,786                46.5
50 - 59%                28                       52,179                55.4
Sub-total                   44               $100,631                  50.0
60 -   69%                  38               $520,946                  64.3
70 -   79%                  22                 76,570                  74.8
80 -   89%                  16                 61,326                  83.2
90 -   99%                   9                 29,332                  91.9
100%   or more          2                        1.617                116.7
Sub-total                   87               $689,791                  68.5

Blue   Cross/Blue     Shield     plans
                    Number of            Earned                       Average
Loss ratios         companies       premiums (000)             loss    ratio  (%L

Under 40%
40 - 49%
50 - 59%                     I                      $527               53.9

Sub-total                    1                      $527               53.9
60 -   69%                   3           $        68,904               65.7
70 -   79%                   7                   111,726               75.9
80 -   89%                  15                   510,690               84.3
90 -   99%                  13                   754,340               95.2
100%   or more              12           $       441,326              109.8

Sub-total                   50           $1,886,986                    93.4
APPENDIX II                                                              APPENDIX II
               DISTRIBUTION OF 1988 MEDIGAP LOSS RATIOS
       FOR POLICIES THAT HAVE BEEN IN FORCE FOR 3 YEARS OR MORE
For Dolicies  sold to arows,
with more than $250,000 in earned              premiums
Commercial    Dlans
                    Number of            Earned                  Average
Loss ratios         companies       premiums (OOOl        loss    ratio  (%)
Under 45%                    4            $ 6,725                 38.0
45 - 54%                     3              1,317                 48.4
55 - 64%                     5              5,773                 58.5
65 - 74%                 7                 34,778                 68.5
Sub-total                 19              $48,593                 62.6
75 -   84%                   3           $ 25,769                 78.2
85 -   94%                   3              4,474                 92.4
95 -   104%                  1            568,199                102.4
105%   or more           3                  1,493                161.3
Sub-total                 10             $599,935                101.5

Blue   Cross/Blue     Shield     plans
                    Number of             Earned                 Average
Loss ratios         companies        premiums (0001       loss    ratio  (%I
Under 45%
45 - 54%                     2            $ 2,496                 47.8
55 - 64%                     2              1,534                 58.1
65 - 74%                     4             43,598                 73.3

Sub-total                    8            $47,628                 71.5

75 -   84%                  5            $ 30,939                 79.3
85 -   94%                11              134,125                 91.3
95 -   104%                 4             173,024                 96.3
105%   or more            6                22,688                112.8
Sub-total                 26             $360,776                 91.4




                                           2
APPENDIX III                                                                 APPENDIX III
                 DISTRIBUTION OF 1988 MEDIGAP LOSS RATIOS
       FOR POLICIES THAT HAVE BEEN IN FORCE FOR LESS THAN 3 YEARS
For oolicies  sold to individuals.
with more than $250,000 in earned                  premiums
Commercial     plans
                     Number of             Earned                    Average
Loss ratios          companies        premiums (0001          loss    ratio  (%I
Under 40%                    17                $ 50,387               32.6
40 - 49%                     23                  88,986               44.1
50 - 59%                     43                 476,239               54.8
Sub-total                    83                $615,612               51.4
60 -    69%                  33                $447,597               62.4
70 -    79%                  12                 160,302               71.4
80 -    89%                   5                  13,573               85.9
90 -    99%                   3                  20,082               93.4
100%    or more          2                        8,000              114.7
Sub-total                    55                $649,554               66.7

Blue    Cross/Blue     Shield      plans
                     Number of              Earned                   Average
Loss ratios          companies         premiums (0001         loss    ratib  (%I
Under 40%
40 - 49%
50 - 59%
sub-total
60 -    69%                    7           S     89,699               68.5
70 -    79%                    6                127,254               73.9
80 -    89%                  10                 479,385               85.6
90 -    99%                  10                 452,326               94.0
100%    or more              3             S     66,606              108.1
sub-total                    36            $1,215,270                 87.5
APPENDIX IV                                                                     APPENDIX IV
                 DISTRIBUTION OF 1988 MEDIGAP LOSS RATIOS
       FOR POLICIES THAT HAVE BEEN IN FORCE FOR LESS THAN 3 YEARS
For oolicies  sold to uroups.
with more than $250,000 in earned                    Dremiums
Commercial     plans
                     Number of             Earned                      Average
Loss ratios          companies        premiums (000)            loss    ratio  (%I
Under 45%                      1               $ 3,246                  34.0
45 - 54%                       4                21,213                  48.0
55 - 64%                       4                11,309                  59.3
65 - 74%                  6                     11.956                  72.2
Sub-total                  15                  $47,724                  55.8
75 -    84%                    1           S        521                 77.7
85 -    94%                    1                60,265                  92.8
95 -    104%                   3               553,092                 100.6
105%    or more                1                 1.828                 117.6
Sub-total                      6           $615,706                     99.9

Blue    Cross/Blue     Shield      DlanS

                     Number of             Earned                      Average
Loss ratios          comganies        premiums (000)            loss    ratio  (%I
Under 45%                      1               S      561               42.8
45 - 54%
55 - 64%
65 - 74%                       2                   12,406               68.4
Sub-total                      3               $12,967                  67.3
75 -    84%                    6           $ 87,947                    .81.9
85 -    94%                    5            217,078                      93.0
95 -    104%                   1             24,136                      95.9
105%    or more            4                 34,394                    115.2
Sub-total                  16              $363,555                     92.6
APPENDIX V                                                                APPENDIX V
              DISTRIBUTION OF 1988 MEDIGAP LOSS RATIOS IF THE
              HIGHER TARGETS OF H. R. 4840 HAD BEEN IN FORCE,
                 FOR POLICIES IN FORCE FOR 3 YEARS OR MORE
For policies  sold to individuals.'
with more than $250,000 in earned              premiums
Commercial      plans
                    Number of            Earned                  Average
Loss ratios         companies       premiums (0001        loss    ratio  (%I
Under 70%                   83             622,870                62.0
70% or more                 48             167,552                81.3
Blue   Cross/Blue       Shield   plans
Under 70%                    4               69,431               65.6
70% or more                 47           1,818,082                94.5


For policies  sold to arouDS.
with more than $250,000 in earned              premiums
Commercial      plans
                    Number of             Earned                 Average
Loss ratios         companies        premiums (0001       loss    ratio  (%I
Under 80%                   21              68,924                67.0
80% or more                  8             579,604               102.3
Blue   Cross/Blue       Shield   plans
Under 80%                   11              76,133                74.3
80% or more                 23             332,271                95.3
APPENDIX VI                                                              APPENDIX VI
              DISTRIBUTION OF 1988 MEDIGAP LOSS RATIOS IF THE
              HIGHER TARGETS OF H. R. 4840 HAD BEEN IN FORCE,
                  FOR POLICIES IN FORCE LESS THAN 3 YEARS
For policies  sold to individuals.
with more than $250,000 in earned              premiums
Commercial      plans
                    Number of            Earned                  Average
Loss ratios         companies       premiums (0001        loss    ratio  (%I
Under 70%                 117            1,135,379                56.9
70% or more                21               129,787               79.9
Blue   Cross/Blue       Shield   plans
Under 70%                    8              114,736               68.7
70% or more                 28           1,100,534                89.4


For policies  sold to crouDS,
with more than $250,000 in earned              DremiUmS
Commercial      plans
                    Number of             Earned                 Average
Loss ratios         companies        premiums (0001       loss    ratio  ('1;)
Under 80%                   16              48,245                56.0
80% or more                  5             615,185                99.9

Blue   Cross/Blue       Shield   plans
Under 80%                    4              15,857                69.0
80% or more                 15             360,665                92.7