Retiree Coverage Chapter 22

2 The Vast Majority of Medicare Beneficiaries Have Some Form of Supplemental Coverage

3 Percentage of the Elderly with No Medicare Supplements, 1993 All Elderly No Supplements Age 74.2 years 74 years Female61.6%52.0% African American 11.8%26.0% Hispanic7.0%8.0% <12 years of education 49.2%67.0% <$10,000 income 43.0%58.0% Excellent/very good health 52.0%39.0% Fair/poor health 27.4%31.0% Source: computed from Khandker and McCormick (1999)

4 Retiree Coverage Employer-Sponsored Coverage Employer-Sponsored Coverage Active worker coverage Active worker coverage Early retiree coverage Early retiree coverage Medicare-eligible retirees Medicare-eligible retirees Medigap Coverage Medigap Coverage Typically 1 of 10 approved plans Typically 1 of 10 approved plans Medicare Advantage Medicare Advantage Medicaid Medicaid Supplementary Security Income (dual eligibles) Supplementary Security Income (dual eligibles) Qualified Medicare Beneficiaries (premium and copays) Qualified Medicare Beneficiaries (premium and copays) Specified Low-Income Beneficiaries (premium only) Specified Low-Income Beneficiaries (premium only)

5 Employer-Sponsored Retiree Coverage Is a Large- Firm Phenomenon

6 Percentage of Large Employers Offering Retiree Coverage Percent Source: data from Kaiser Family Foundation (2005)

7 Reasons for the Decline FASB rules on disclosure of retiree health benefits liability FASB rules on disclosure of retiree health benefits liability Unlikely Unlikely Increased mobility of labor force Increased mobility of labor force Retiree health insurance analogous to defined benefit pension plans—enhanced mobility makes these plans less desirable Retiree health insurance analogous to defined benefit pension plans—enhanced mobility makes these plans less desirable Difficult to extract the compensating wage differential Difficult to extract the compensating wage differential

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9 Comparative Premiums Early Retirees Early Retirees $487/month in 2004 $487/month in 2004 Medicare-eligibles $262/month in 2004 ESHI may be a secondary payer to Medicare Source: Kaiser Family Foundation (2005)

10 Coordinating Benefits Medicare and employer-sponsored coverage is subject to coordination of benefits Medicare and employer-sponsored coverage is subject to coordination of benefits Active workers Active workers Employer is primary payer and Medicare is secondary payer using “coordination of benefits” Employer is primary payer and Medicare is secondary payer using “coordination of benefits” Retired workers Retired workers Medicare is primary payer and employer is secondary payer Medicare is primary payer and employer is secondary payer Coordination of benefits method Coordination of benefits method Carve-out method Carve-out method Exclusion method Exclusion method

11 Basic Assumptions – circa 2006 MEDICARE COVERAGE Physician: Physician:.80($2,000 - $131) = $1,495.80($2,000 - $131) = $1,495 Hospital: Hospital: $6,000 - $992 = $5,008 $6,000 - $992 = $5,008 Total: $6,503 Total: $6,503 Beneficiary would pay remainder: $1,497 Beneficiary would pay remainder: $1,497 EMPLOYER COVERAGE Employer provides 80/20 coinsurance after $500 deductible.80($8,000 - $500) = $6,000 Retiree would pay the remainder: $2,000 Physician bill = $2,000, Hospital bill = $6,000, Total bill = $8,000

12 Coordination of Benefits Method Total bill = $,8000 Total bill = $,8000 Medicare Pays = $6,503 Medicare Pays = $6,503 Employer Pays = $1,497 Employer Pays = $1,497 Beneficiary Pays = $ 0 Beneficiary Pays = $ 0 The employer considers Medicare payments to first apply to the retiree’s share, with any residual applying to the firm’s share The employer considers Medicare payments to first apply to the retiree’s share, with any residual applying to the firm’s share 34 percent of employers used this method in percent of employers used this method in 1988

13 Carve-Out Method Total bill = $,8000 Total bill = $,8000 Medicare Pays = $6,503 Medicare Pays = $6,503 Employer Pays = $ 0 Employer Pays = $ 0 Beneficiary Pays = $1,497 Beneficiary Pays = $1,497 The employer considers Medicare payments to first apply to the employer’s share, with any residual applying to the retiree’s share. The employer considers Medicare payments to first apply to the employer’s share, with any residual applying to the retiree’s share. 46 percent of employers (but 80 percent of retirees) used this method in percent of employers (but 80 percent of retirees) used this method in 1988

14 Exclusion Method Total bill = $,8000 Total bill = $,8000 Medicare Pays = $6,503 Medicare Pays = $6,503 Employer Pays = $ 798 Employer Pays = $ 798 Beneficiary Pays = $ 699 Beneficiary Pays = $ 699 After Medicare’s payment, the employer applies its deductible and coinsurance to the remainder After Medicare’s payment, the employer applies its deductible and coinsurance to the remainder 19 percent of employers used this method in percent of employers used this method in 1988

15 Medigap Coverage Coverage typically pays the deductibles and copays associated with covered Medicare services Coverage typically pays the deductibles and copays associated with covered Medicare services It seldom covers more It seldom covers more In 1990 Congress mandated that 10 types of coverage would be permitted based upon National Association of Insurance Commissioners (NAIC) model plans beginning in 1992 In 1990 Congress mandated that 10 types of coverage would be permitted based upon National Association of Insurance Commissioners (NAIC) model plans beginning in 1992 Plus “select” plans that limit provider choice Plus “select” plans that limit provider choice

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17 Distribution of Medigap Enrollees by Plan, 2001 Source: data from Chollet (2003, Table 1)

18 Medigap and Prescription Drug Coverage The Medicare Modernization Act eliminates plan options with drug coverage (H, I, J) The Medicare Modernization Act eliminates plan options with drug coverage (H, I, J) It also allows new plans (K and L) in 2007 that will include a high-deductible feature It also allows new plans (K and L) in 2007 that will include a high-deductible feature

19 Medigap Underwriting Rating Rating Age-attained rated Age-attained rated Costs more for older purchasers Costs more for older purchasers Issue-age rated Issue-age rated Costs more for younger purchasers Costs more for younger purchasers Community rated Community rated Costs more for younger purchasers Costs more for younger purchasers Tobacco use Costs more Guaranteed issue Costs more Select plan Limited panel of providers Costs less Source: Robst (2006)

20 Medigap Regulation - 1 Did the congressional mandate of 10 Medigap plans increase the probability that a retiree without employer- related coverage had a supplement? Did the congressional mandate of 10 Medigap plans increase the probability that a retiree without employer- related coverage had a supplement? Using 1976–1986 NHIS data, Finkelstein (2004) found that the congressional mandates reduced the probability of coverage by 4.9 percentage points in the first two years and by 8 percentage points after three years. Using 1976–1986 NHIS data, Finkelstein (2004) found that the congressional mandates reduced the probability of coverage by 4.9 percentage points in the first two years and by 8 percentage points after three years. Approximately 25 percent reduction Approximately 25 percent reduction No evidence of movement to other types of coverage No evidence of movement to other types of coverage

21 Medigap Regulation - 2 Does state regulation of Medigap underwriting affect premiums and coverage? Does state regulation of Medigap underwriting affect premiums and coverage? Yes. Seven states require community rating, and three banned age-attained policies. Bundorf and Simon (2006) used 1999 MCBS data and concluded that the community-rating states had no effect on the probability of coverage but changed the mix. Yes. Seven states require community rating, and three banned age-attained policies. Bundorf and Simon (2006) used 1999 MCBS data and concluded that the community-rating states had no effect on the probability of coverage but changed the mix. 2.8 percentage point ↑ for high risk 2.8 percentage point ↑ for high risk 2.5 percentage point ↓ for low risk 2.5 percentage point ↓ for low risk

22 Effects of Supplemental Coverage on Medicare Spending To the extent that supplemental coverage reduces the out-of-pocket price of Medicare- covered services, we should expect that people will slide down the demand curve and consume more services. To the extent that supplemental coverage reduces the out-of-pocket price of Medicare- covered services, we should expect that people will slide down the demand curve and consume more services. This increases Medicare’s costs if it pays for any portion of the extra services. This increases Medicare’s costs if it pays for any portion of the extra services. It is typical for Medicare to pay 80 percent of Part B services, for example. It is typical for Medicare to pay 80 percent of Part B services, for example.

23 Estimates of the Effects on Medicare Khandker and McCormick (1999) use the 1993 MCBS data to examine use of services by type of supplement controlling for self-reported health status, among other things. Khandker and McCormick (1999) use the 1993 MCBS data to examine use of services by type of supplement controlling for self-reported health status, among other things.

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25 Medicare Managed Care Variety of names: Variety of names: Medicare HMOs Medicare HMOs Medicare+Choice Medicare+Choice Medicare Advantage (since November 2004) Medicare Advantage (since November 2004) In lieu of Medicare Parts A and B, a subscriber may choose to enroll in a Medicare Advantage plan In lieu of Medicare Parts A and B, a subscriber may choose to enroll in a Medicare Advantage plan

26 Types of Medicare Advantage Plans HMOs HMOs PPOs PPOs Local and regional Local and regional Private fee for service (PFFS) Private fee for service (PFFS) Medicare MSA—high-deductible policy with a medical savings account Medicare MSA—high-deductible policy with a medical savings account Special needs plans (SNPs) Special needs plans (SNPs)

27 Paying Medicare Advantage Plans CMS establishes a benchmark per capita rate CMS establishes a benchmark per capita rate Plans bid Plans bid If below the benchmark If below the benchmark CMS keeps 25 percent of the difference CMS keeps 25 percent of the difference Remaining 75 percent is to be rebated to the beneficiary in the form of lower cost sharing and/or greater benefits Remaining 75 percent is to be rebated to the beneficiary in the form of lower cost sharing and/or greater benefits If above the benchmark If above the benchmark Plan charges the beneficiary a premium Plan charges the beneficiary a premium Actual payments are adjusted to reflect enrollment using the Hierarchical Condition Categories (HCCs) Actual payments are adjusted to reflect enrollment using the Hierarchical Condition Categories (HCCs)

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29 Medicare Advantage Enrollment is Price Sensitive Study of 1998 Medicare Current Beneficiary Survey data. Study of 1998 Medicare Current Beneficiary Survey data. Findings: Findings: Estimated out-of-pocket premium elasticity from the consumer’s perspective is low –.134 (but –4.57 from the insurer’s perspective) Estimated out-of-pocket premium elasticity from the consumer’s perspective is low –.134 (but –4.57 from the insurer’s perspective) A typical plan would lose.62 percentage points of market share with a $10 increase in premium A typical plan would lose.62 percentage points of market share with a $10 increase in premium Beneficiaries responsive to plan characteristics with prescription drug coverage having the largest marginal effect Beneficiaries responsive to plan characteristics with prescription drug coverage having the largest marginal effect Source: Atherly, Dowd, and Feldman (2004)

30 Competition between Medigap and Medicare Advantage Plans Study of Medicare HMO enrollment over the 1996– 1997 period using the Community Tracking Survey Study of Medicare HMO enrollment over the 1996– 1997 period using the Community Tracking Survey 56 sites in 30 states 56 sites in 30 states Findings: Findings: Medigap premiums vary across markets, insurers, and coverage Medigap premiums vary across markets, insurers, and coverage Strong positive correlation between Medigap premiums and Medicare HMO enrollment Strong positive correlation between Medigap premiums and Medicare HMO enrollment One standard deviation increase ($236 to $291/year) in Medigap premiums associated with an increase in HMO participation of 8 percentage points. One standard deviation increase ($236 to $291/year) in Medigap premiums associated with an increase in HMO participation of 8 percentage points. Source: McLaughlin, Chernew, and Taylor (2002)

31 Summary Vast majority of Medicare beneficiaries have some form of additional coverage Vast majority of Medicare beneficiaries have some form of additional coverage ESHI—retiree coverage ESHI—retiree coverage Medigap—pays deductibles and copays Medigap—pays deductibles and copays Medicare Advantage—managed care Medicare Advantage—managed care Medicaid—for low income Medicaid—for low income Supplements increase Medicare expenditures Supplements increase Medicare expenditures Competition among Medigap and Medicare Advantage Competition among Medigap and Medicare Advantage Interesting but as yet unexamined effects of Part D on the private retiree market Interesting but as yet unexamined effects of Part D on the private retiree market

32 Discussion Questions o Why would an employer offer retiree health benefits?

33 Discussion Questions o What effects do you think the Medicare prescription drug program will have on the Medigap market? On the employer-sponsored retiree health insurance market? On the Medicare Advantage market?

34 Discussion Questions o Is Medigap coverage a “good buy” for seniors? Is it consistent with the theory of the demand for insurance we studied in Chapter 3? If not, why would it be so popular?