oversight

Medigap Insurance: Expected 1990 Premiums After Repeal of the Medicare Catastrophic Coverage Act

Published by the Government Accountability Office on 1990-01-08.

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

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                      United States General Accounting Off!ice
                      Testimony


                                                                 Illlllllll
                                                                        IllIll
                                                                    140341


    For Release         HEDIGAP INSURANCE:
    on Delivery         Expected 1990 Premiums after
    Expected at         Repeal of the Medicare
    Harrisburg, PA,     Catastrophic  Coverage Act
    9:00 a.m. EST
    Monday
    January 8, 1990




                        Statement of
                        Janet Shikles,    Director
                           Health Financing     and Policy
                           Issues
                        Human Resources Division
                        Before the
                        Special  Committee on Aging
                        United States Senate




                        W?Uac,/i(-1634
    GAO/T-HRD-90-9
                                        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.     Policies
may also provide     benefits for services    not covered by Medicare.
        In 1988,   the Congress passed the Medicare Catastrophic
Coverage Act,      one of the most significant      expansions   of the
program since      its beginning.      The changes contained   in that Act
significantly      reduced the liability     of beneficiaries    who require
a substantial      amount of health care services.
      In November 1989, the Congress repealed the Act and restored
Medicare benefits  to what they were before the Catastrophic
Coverage Act.
       As a result     of repeal of the Catastrophic         Coverage Act,
Medigap policies       must now provide benefits        that the insurers     did
not expect to provide        in 1990.    Also, the National       Association    of
Insurance     Commissioners    has revised    its minimum benefit       standards
to require     Medigap policies     to cover some expenses of
policyholders      that were not required       before,    such as part B
coinsurance     after   the beneficiary     pays the annual part B
deductible     of $75.
         GAO surveyed 29 commercial             Medigap insurers       in preparation
for these hearings.              The insurers      each had at least $10 million
in earned premiums for Medigap policies                   in 1987 (the latest         year
for which GAO had reasonably                 complete data).        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 MCCA. The companies said that the
other half of the increase                 was due to other factors,         such as
 inflation,         increased    utilization      of medical    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.        Thirty-eight  of these 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.
Senator        Heinz        and Members of the                        Committee:
           We are pleased               to be here              today          to discuss            the    effect      of
repeal        of the        Medicare           Catastrophic                   Coverage        Act     (MCCA) of 1988
(P.L.        100-360)         on premiums              for      Medicare           supplemental,              or Medigap,
insurance.              Twenty        of the         larger           commercial           Medigap          insurers          we
surveyed         told       us they          expect          their           1990 premiums            to be an average
of about         20 percent             higher         than          their      1989 premiums.                The companies
attributed            about      half        of this          increase           to increased              benefits           and
administrative                costs      necessitated                   by repeal          of the          MCCA.       The
companies            said    that       the        other      half       of the         increase           was due to other
factors,        such as inflation,                         increased            utilization            of medical
services,            and prior          years'         claims           experience.
THE MEDICARE PROGRAMAND MEDIGAP INSURANCE
           Medicare         provides          coverage           for         a broad       range of health
services        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
alsg       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 MCCA AND ITS REPEAL
       The 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 Congress          on the effects             of the      MCCA on benefits
provided      by the         Medicare      program           and Medigap        insurancel.                In both
instances,          we noted     that      the       MCCA expanded          Medicare         benefits             and
thus   reduced        the     coverages          required       of Medigap          policies.




lSee "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 Premiums",   Statement of Mr. Michael
Zimmerman before the Subcommittee     on Commerce, Consumer Protection,
and,Competitiveness,    House Committee on Energy and Commerce (GAO/T-
HRD-89-13, Apr. 6, 1989).
                                                         2
       In November                1989, the         Congress            passed         legislation              to    repeal
the   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.
THE EFFECT OF REPEAL OF
MCCA ON MEDIGAP POLICIES
       As a result                of Congress'             passage            and repeal            of MCCA, NAIC
revised     its          model Medigap             law and regulation                      twice.             The first
revision      recognized                the      changes        in Medicare               contained            in the         MCCA.
The second          revision,            adopted          in early            December 1989,                  changed the
minimum standards                  to    reflect          the       Act's      repeal.           The minimum benefit
standards          for      Medigap       policies,             however,            are different               from those
required      before             the MCCA was enacted.                         For example:
       --   For services                 covered          under        part        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        the
            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
                                                                3
.   .




                       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.
        THE EFFECT OF REPEAL OF
        MCCA ON MEDIGAP PREMIUMS
                  In November                  1989,         we reported                to the          Chairman,          Subcommittee
        on Health,            House Committee                         on Ways and Means, on expected                                      Medigap
        premium       changes             if         the     MCCA were repealed2,                            In our        survey,          we
        contacted           29 of the                     commercial            insurers           that     had over             $10 million
        of earned           premiums                 on Medigap             policies           during         calendar            year      1987
        (the      latest          year         for         which      we had reasonably                     complete             data).          We
        asked each company to                               estimate            its     1990 premium               for     its     largest
        selling       policy.                  At that             time,     20 of the              29 commercial                 Medigap
        insurers           told         us that             they     expected             their         premiums          for     Medigap
        policies           in 1990 to be,                        on average,              2.4 percent              higher         than      their
        1989 premium               if     the             MCCA remained                in effect.             Those insurers                 also
        told      us they          expected                 to     increase            their       1990 premium                 an average          of
        an additional                   15.4     percent             over        what the           premium         would         be if      the
        Congress           repealed             the         Act.       In combination,                     these         increases          would
        result       in an average                         increase        of         $10.64      per month              (18.1     percent)
        over      1989 premiums                      if     Congress         repealed             the      Act.          The policies            sold
        by these           20 companies                     covered        about          2.5 million              policyholders.




        2Medicare Catastrophic Act:   Estimated Effects of Repeal on
        Mediqap Premiums and Medicaid Costs (GAO/HRD-90-48FS, Nov. 6,
        1989).
                                                                                 4
           In preparation                      for         these      hearings,             we contacted            those            29
companies              again     to obtain                    (1) their             current          estimate       of their               1990
premium           and (2)        their               reasons          for     premium          changes.
          Twenty           companies                 responded              to our         latest       request          and are
listed          in appendix               I to this                  statement.               The policies               sold     by these
20     companies            covered             about          2.6     million             policyholders.                 Eighteen              of
these          companies         had provided                        us data         for      our     survey       for     the
Subcommittee                on Health.                      The 20 companies                   now 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              same as its           1989
premium.               Appendix           II     to this              statement             shows the           current          estimates
from the twenty                  companies.
          There         are     four       general                 reasons       why these              companies          expect           to
increase           their        premiums.                    General          inflation              within      the medical
sector          of the         economy,               increased              utilization              of medical           services              by
senior          citizens,           and higher                  than         expected          claims          experience             in
prior          years       accounted                 for     about       half        of the          increase.            The
companies              attributed               the         other      half      of the             increase      to repeal                of
the MCCA.               The companies                       said      that      changes             required      by repeal                of
the      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
poljcies           and notices                  to policyholders.                           No companies            told         us they

                                                                         5
were      increasing            premiums         to "catch-up'              because             they     did        not
increase        or    insufficiently                increased            their       premiums            in     1989.
          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 sum, many factors                   affect          premiums          for     Medigap            insurance.
In the      legislation            to repeal          the        MCCA, the           Congress            restored
coverage        under     the      Medicare          program            to what existed                  before           the      Act
was passed.            Repeal          of the       Act had the             effect         of placing               benefit
requirements           on Medigap            policies            that     the      insurers            did      not expect
to   face      in 1990.           Also,      the     NAIC has revised                     its     minimum benefit
standards        to     require          Medigap      policies            to cover              some expenses                of
policyholders            that      were not covered                     before,          such as the             lower
policy      deductible            on part        B coinsurance.
          Senator,       this      concludes          my prepared                 remarks.             I will         be happy
to answer        any questions               you have.




                                                             6
APPENDIX I                                                        APPENDIX I

INSURANCE COMPANIES 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




                                     1
APPENDIX II                                               APPENDIX II
   EXPECTED INCREASES IN 1990 MONTHLY MEDIGAP INSURANCE PREMIUMS
      AFTER REPEAL OF THE MEDICARE CATASTROPHIC COVERAGEACT
                                         1990
                          1989      expected
                      monthly        monthly         Increase
 Company              premium        prem,ium   (percentage)
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
Company   AE            73.46          80.79             1:::
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