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Medigap Reforms: Potential Effects of Benefit Restrictions on Medicare Spending and Beneficiary Costs

As part of several debt-reduction and Medicare-reform proposals, some policymakers propose to prohibit Medicare supplemental insurance policies (known as Medigap) from covering all of enrollees’ out-of-pocket Medicare costs, which some believe leads to higher use of services and higher Medicare spending. Such changes would expose Medigap enrollees – currently about one in six Medicare beneficiaries – to a larger share of Medicare’s cost-sharing requirements.

This analysis commissioned by the Kaiser Family Foundation examines three potential Medigap reforms, including one that is similar to a recommendation of the National Commission on Fiscal Responsibility and Reform (known as the Bowles-Simpson Commission).

The analysis estimates that the three options could save between $1.5 billion and $4.6 billion in Medicare spending in a single year. Under each of the options, enrollees would see an increase in average out-of-pocket spending for Medicare-covered services, as their Medigap policies become less generous. As a result of higher cost-sharing requirements, beneficiaries with Medigap could be expected to use fewer Medicare-covered services, leading to a decrease in average Medigap premiums.

The analysis finds that most Medicare beneficiaries with Medigap policies would be expected to pay less for their health care overall. However, Medigap reforms that prohibit first dollar coverage and charge additional coinsurance for hospital, home health and other services would have a disproportionately negative impact on Medigap enrollees who are in relatively poor health, those who require inpatient hospital care, and those with modest incomes – as these groups are more likely to face higher overall health care costs as a result of the changes.

The analysis does not attempt to estimate how much of this reduction in the use of Medicare services would be attributable to enrollees foregoing needed care or how it would affect enrollees’ health and future medical needs – which potentially could have both health and spending implications over the long term.

The study was authored by Mark Merlis. It is part of a series of Kaiser Family Foundation studies examining the effects of proposed Medicare changes on the program’s beneficiaries, the federal budget and other stakeholders, as part of the Kaiser Project on Medicare’s Future.

Report (.pdf)