Putting a Donut Hole Back in Medicare: Proposals to Increase Medigap Costs Put Vulnerable Beneficiaries at Risk

Among proposals aimed at reducing federal spending for Medicare, some are suggesting that Medigap insurance be restructured to increase the cost-sharing burden on beneficiaries and/or add a surcharge for those that choose plans offering “first-dollar” or “near first-dollar” coverage.   These proposals operate under the assumption that charging beneficiaries more in up-front, out-of-pocket costs will deter them from using unnecessary care.  But this assumption ignores the fact that adding costs for Medigap insurance will deter many beneficiaries from seeking medically necessary care. While these proposals might yield limited federal savings in the short term, such savings would lead many to forego needed care until more acute, and costly, treatment is needed.[1]

Two thirds of people with Medigap coverage live on incomes below $40,000. In addition to monthly Part B and Part D premiums, beneficiaries pay Medigap premiums ranging from $178 – $220 per month.[2]  Beneficiaries turn to Medigap policies for greater financial stability and predictability in determining their health spending, especially if they require more health care services to manage chronic conditions.

Proposals that impose co-pays, deductibles, cost-sharing, or eliminate “first-dollar” Medigap coverage would particularly harm people with chronic conditions and people with limited incomes. This is akin to a “sick tax,” forcing people who need care to pay more and get less.  For example, under some Medigap restructuring proposals, it is estimated that 37% of beneficiaries in fair or poor health would face higher costs, as would people with more hospitalizations.[3]

The Affordable Care Act closes the Part D Donut Hole, the built-in gap in prescription drug coverage that forces beneficiaries to pay out-of-pocket for all drug costs between an initial coverage limit and higher, catastrophic limit.  Imposing additional up-front Medigap costs for beneficiaries would create a new Donut Hole, just as we close the old one.  It would also encourage people to leave traditional Medicare and join private Medicare Advantage plans, which are more expensive for Medicare and taxpayers.

There are better ways to achieve savings in Medicare without shifting additional costs to beneficiaries; we urge policymakers to explore them.[4]

For more information, contact policy analyst Xenia Ruiz (xruiz@medicareadvocacy.org) or attorney David Lipschutz (dlipschu@medicareadvocacy.org) in our Washington, DC office at (202) 293-5760.


[1] See Medicare Supplement Insurance First Dollar Coverage and Cost Shares Discussion Paper, National Association of Insurance Commissioners (NAIC), Senior Issues Task Force, Medigap PPCA Subgroup, (October 2011), available at: http://www.naic.org/documents/committees_b_senior_issues_111101_medigap_first_dollar_coverage_discussion_paper.pdf.  Also see, e.g., Leadership Council on Aging (LCAO) issue brief “Reforming Medigap Plans by Shifting Costs onto Beneficiaries: A Flawed Approach to Achieving Medicare Savings” (December 2012), available at: http://www.lcao.org/docs/LCAO-Medigap-Issue-Brief-12-12.pdf
[2] Medigap Reform: Setting the Context, Kaiser Family Foundation, (September 2011), available at http://www.kff.org/medicare/8235.cfm.
[3]Medigap Reform: Potential Effects of Benefit Restrictions on Medicare Spending and Beneficiary Costs, Kaiser Family Foundation, (July 2007), available at http://www.kff.org/medicare/8208.cfm.
[4] See, e.g., previous Weekly Alerts, including finding drug savings in Medicare (November 2011) http://www.medicareadvocacy.org/2012/11/15/deficit-reduction-and-medicare-save-money-without-harming-beneficiaries/ ; Prescription Drug Rebates (July 2011) http://www.medicareadvocacy.org/2011/07/21/debunking-medicare-myths-drug-rebates-for-dual-eligibles/ ; and additional options for achieving Medicare savings (June 2011) http://www.medicareadvocacy.org/2011/06/09/so-what-would-you-do-real-solutions-for-medicare-solvency-and-reducing-the-deficit/.