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Medigap Surcharges: They're Back

By Jane Norman, CQ HealthBeat Associate Editor

April 11, 2013 -- The president's budget proposal for fiscal 2014 again called for a surcharge on supplemental Medicare plans, and that idea has received a boost from the head of a commission that advises Congress on Medicare policy.

Glenn Hackbarth, chairman of the Medicare Advisory Payment Commission, said many beneficiaries buy supplemental Medicare insurance policies that cover even the first dollar of their required cost sharing.

The insurance policies often come at a "very high price," and, once obtained, there's little incentive for a senior to pass up medical services or think about their value, he said. "In our view, the principal winners from the status quo are the insurance companies that sell supplemental coverage. It's a lose-lose proposition for Medicare beneficiaries and for taxpayers," Hackbarth told the health subcommittee of the House Energy and Commerce Committee.

The commission is an independent body with a staff of health policy analysts, and after extended discussion, commissioners make recommendations that often gain serious consideration by Congress, though they have no official weight.

Hackbarth said a redesigned Medicare package should include an out-of-pocket limit as a way to shield beneficiaries from catastrophic costs and reduce their fears that they'll wind up broke, which is why they flock to the Medigap policies.

Obama also proposed raising money through a surcharge on Medigap plans in his fiscal 2013 budget plan and in an earlier deficit proposal, but the idea failed to win support. Among opponents were the National Association of Insurance Commissioners, which in 2011 expressed criticism of a similar Obama proposal, saying it could harm low-income seniors.

But in the budget that Obama released last week, he said the surcharge makes sense. "Some Medigap plans cover all or almost all copayments, including even modest copayments for routine care that most beneficiaries can afford," the Department of Health and Human Services said in the budget outline. "This practice gives beneficiaries less incentive to consider the cost of services, leading to higher Medicare costs and Part B premiums."

So the administration proposed a new Part B premium surcharge for new beneficiaries who buy Medigap policies with low cost-sharing requirements, effective in 2017, according to the budget document. Plans that met an undefined higher level of cost sharing would be exempt. The surcharge, which would amount to about 15 percent of the average Medigap premium, would raise $2.9 billion over 10 years.

Subcommittee Chairman Joseph Pitts, R-Pa., indicated a willingness to start discussions on a revision of Medicare's design, including a Medigap surcharge. "We should have a single deductible for Parts A and B, and we should streamline benefits so that fewer seniors will have to purchase supplemental coverage with money from their own pocket," Pitts said in his remarks. "We should institute a catastrophic cap on out-of-pocket spending to protect seniors from the threat of medical bankruptcy."

Hackbarth also said commissioners believe that copayments, which specify fixed dollar payments for a service, should be used in Medicare rather than coinsurance, which specifies a fixed percentage that should be paid.

"The commission prefers the set dollar amounts of copayments because they are more clearly understood by beneficiaries and reduce uncertainty," Hackbarth said. "Especially if the amounts are set to create incentives for beneficiaries to make better decisions about their use of care, copayments are easy to understand, compare and respond to."

The top Democrat on Energy and Commerce, California's Henry A. Waxman, warned, however, that the surcharges should not be put in place without other changes to Medicare's benefit design because the policies often are held by older and sicker beneficiaries. Increases in charges could harm them and leave them vulnerable to high costs, he said.

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