Health Insurance for the Elderly: Owning Duplicate Policies Is Costly and
Unnecessary (Letter Report, 08/03/94, GAO/HEHS-94-185).

Owning multiple health insurance policies to supplement Medicare is both
costly and unnecessary.  GAO estimated that about 3 million elderly
Medicare beneficiaries paid about $1.8 billion in 1991 for policies that
probably involved duplicate coverage. Many of these people had
supplemental coverage through employer-sponsored plans.  About 500,000
other Medicare beneficiaries who were also eligible for Medicaid because
of the limited incomes spent about $190 million on unnecessary
supplemental insurance. Although retirees with employer-sponsored
coverage generally do not need to buy a Medigap policy, many employers
with retiree health plans are increasing cost-sharing or tightening
eligibility requirements.  Such changes may make an employer-sponsored
plan less attractive.  In addition, the employer may terminate the plan.
Federal Medigap requirements provide a one-time "open season" for
people to buy Medigap insurance, regardless of health status, within six
months of enrolling in Medicare part B. If a retiree's
employee-sponsored plan is changed or cancelled after the open season,
the retiree has lost the guaranteed access to a Medigap plan.  To
alleviate this potential problem, Congress would have to revise the law.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-94-185
     TITLE:  Health Insurance for the Elderly: Owning Duplicate Policies 
             Is Costly and Unnecessary
      DATE:  08/03/94
   SUBJECT:  Health insurance
             Elderly persons
             Beneficiaries
             Health insurance cost control
             Health care services
             Insurance companies
             Retirement benefits
             Eligibility criteria
IDENTIFIER:  Medicare Program
             Medicaid Program
             
**************************************************************************
* This file contains an ASCII representation of the text of a GAO        *
* report.  Delineations within the text indicating chapter titles,       *
* headings, and bullets are preserved.  Major divisions and subdivisions *
* of the text, such as Chapters, Sections, and Appendixes, are           *
* identified by double and single lines.  The numbers on the right end   *
* of these lines indicate the position of each of the subsections in the *
* document outline.  These numbers do NOT correspond with the page       *
* numbers of the printed product.                                        *
*                                                                        *
* No attempt has been made to display graphic images, although figure    *
* captions are reproduced. Tables are included, but may not resemble     *
* those in the printed version.                                          *
*                                                                        *
* A printed copy of this report may be obtained from the GAO Document    *
* Distribution Facility by calling (202) 512-6000, by faxing your        *
* request to (301) 258-4066, or by writing to P.O. Box 6015,             *
* Gaithersburg, MD 20884-6015. We are unable to accept electronic orders *
* for printed documents at this time.                                    *
**************************************************************************


Cover
================================================================ COVER


Report to Congressional Requesters

August 1994

HEALTH INSURANCE FOR THE ELDERLY -
OWNING DUPLICATE POLICIES IS
COSTLY AND UNNECESSARY

GAO/HEHS-94-185

Health Insurance for the Elderly


Abbreviations
=============================================================== ABBREV

  HCFA - Health Care Financing Administration
  OBRA 1990 - Omnibus Budget Reconciliation Act of 1990

Letter
=============================================================== LETTER


B-252804

August 3, 1994

The Honorable John D.  Dingell
Chairman
The Honorable Carlos J.  Moorhead
Ranking Minority Member
Committee on Energy and Commerce
House of Representatives

The Honorable Sam Gibbons
Acting Chairman
The Honorable Bill Archer
Ranking Minority Member
Committee on Ways and Means
House of Representatives

The Honorable Daniel Patrick Moynihan
Chairman
The Honorable Bob Packwood
Ranking Minority Member
Committee on Finance
United States Senate

The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990)\1

amended federal requirements for Medicare supplemental (Medigap)
insurance policies.  One of the changes prohibits the sale of health
insurance policies that duplicate coverage beneficiaries receive
under Medicare or other health insurance.\2 Some in the insurance
industry complained that this prohibition prevented them from selling
policies such as hospital indemnity insurance (which pays a set
amount for each day a person is hospitalized) to Medicare
beneficiaries and from selling Medigap policies to beneficiaries who
have employer-sponsored retiree health plans.  The insurers believed
that selling such policies to Medicare beneficiaries would provide
them worthwhile and important coverage. 

In 1991, 86 percent of the 28 million elderly\3 Medicare
beneficiaries had some form of additional health insurance.  About 73
percent of all elderly beneficiaries had one additional policy, but
about 13 percent had multiple additional policies. 

You asked us to examine the potential for duplicate coverage among
health insurance policies sold to elderly Medicare beneficiaries. 
You also asked us to assess the necessity for a beneficiary covered
by an employer-sponsored retiree plan to purchase a Medigap policy. 
We used a 1991 survey of beneficiaries conducted for the Health Care
Financing Administration (HCFA) to obtain the number and types of
additional policies purchased by beneficiaries.  We surveyed
employers to determine coverage under their retiree plans.  (See app. 
I for additional details on our scope and methodology.)


--------------------
\1 Public Law 101-508, title IV, part 5, Nov.  5, 1990. 

\2 42 U.S.C.  1395ss(d)(3)(A). 

\3 For this report, the term "elderly" refers to persons 65 years of
age and older but excludes those who have employer-sponsored health
coverage through a current employer. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Owning multiple health insurance policies to supplement Medicare is
both costly and unnecessary.  We estimate that about 3 million
elderly Medicare beneficiaries paid about $1.8 billion in 1991 for
policies that probably involved duplicate coverage.  Many of these
people had supplemental coverage through employer-sponsored plans. 
We reviewed 192 employer-sponsored plans, and in our opinion, they
usually provided reasonably comprehensive coverage.  Enrollees of
such employer-sponsored insurance plans did not need to purchase a
Medigap policy. 

About 500,000 other Medicare beneficiaries who were also eligible for
Medicaid because of their limited incomes spent about $190 million on
unnecessary supplemental insurance.  Medicaid recipients receive
comprehensive medical coverage at little or no out-of-pocket cost and
do not need additional insurance. 

Although retirees with employer-sponsored coverage do not as a rule
need to purchase a Medigap policy, employer-sponsored insurance is
not secure.  A recent nationwide survey disclosed that many employers
offering retiree health plans are increasing cost-sharing or
tightening eligibility requirements.  Such changes may make an
employer-sponsored plan less attractive.  In addition, the employer
may terminate the plan. 

Federal Medigap requirements provide, in effect, a one-time "open
season" for people to purchase Medigap insurance, regardless of
health status, within 6 months of enrolling in part B of Medicare.\4
If a retiree's employer-sponsored plan is changed or terminated after
the open season, the retiree has lost the guaranteed access to a
Medigap plan contained in the law.  To alleviate this potential
problem, the Congress would have to revise the law.  Alternatives
include changing the federal Medigap law to guarantee a Medigap open
season for retirees whose employer-sponsored plans are terminated or
substantially changed, or requiring a periodic open season for all
Medicare beneficiaries. 


--------------------
\4 42 U.S.C.  1395ss(s)(2)(A). 


   BACKGROUND
------------------------------------------------------------ Letter :2

Medicare is a federal health insurance program for persons aged 65
years and older and certain disabled persons.  Medicare benefits are
provided under two parts.  Part A covers inpatient hospital, skilled
nursing facility, home health, and hospice services.  Part B covers
physician services and a broad range of other ambulatory services,
such as laboratory and X-ray services and medical equipment used in
the home.  Beneficiaries share in the cost of their health care
through deductibles and coinsurance for parts A and B and premiums
for part B. 

Medigap insurance is private insurance specifically designed to
complement Medicare by filling in some of the gaps in coverage, such
as deductibles and coinsurance.  Some policies also pay for health
services not covered by Medicare, such as outpatient prescription
drugs.  To facilitate comparison shopping, OBRA 1990 amended the
Medigap law to require that Medigap policies be standardized into no
more than 10 benefit combinations.\5

(See app.  II for a description of these combinations, which are
denoted by letters "A" through "J.")

Employer-sponsored health plans generally offer retirees 65 years old
or older broad coverage.  Typical employer plans assist in paying
Medicare coinsurance and deductibles for basic medical services,
including hospital, physician, laboratory, and X-ray services.  Plans
may also cover prescription drugs, a major expense for some senior
citizens, and plans may cap a retiree's liability through an
out-of-pocket limit.  Retirees may be required to share in the cost
of their coverage through deductibles, coinsurance, and premiums. 

Hospital indemnity, specified disease, and long-term care policies
are limited benefit insurance.  Hospital indemnity insurance pays a
fixed amount, such as $75, for each day the insured is a hospital
inpatient, up to a designated number of days.  These benefits are not
based on the insured's actual expenses.  Specified disease insurance
provides coverage for a named disease or diseases; a common form is
cancer insurance.  These policies generally pay a fixed amount for
each day of hospitalization or outpatient treatment for the specified
disease.  Some policies help pay for certain surgical procedures or
provide a first-occurrence payment if the insured is diagnosed with
the covered disease.  Long-term care policies typically pay a fixed
daily benefit when the insured is in a nursing facility or requires
home health care.  Coverage typically includes skilled, intermediate,
and custodial nursing facility care and home care.  These policies
may allow the purchaser to choose among different options for waiting
periods (the number of days one must be in the facility before
benefits begin), the amount of daily benefit, and the number of
benefit days, for varying premium levels. 

Medicaid is a federal-state program that pays for health services
needed by eligible low-income people.  Medicaid covers a broad range
of health care services, requiring, at most, nominal out-of-pocket
payments from its enrollees.  It is administered by the states, with
financial participation by the federal government. 


--------------------
\5 42 U.S.C.  1395(p)(2). 


   POTENTIAL FOR DUPLICATE
   COVERAGE
------------------------------------------------------------ Letter :3

Purchasing multiple policies to supplement Medicare can result in
overlapping benefits and duplicate coverage.  Figure 1 shows benefits
available under different types of supplemental insurance, which
illustrates where duplication may occur.  Medigap and
employer-sponsored plans generally cover all or part of the
policyholder's Medicare-required deductibles and coinsurance, and
these plans may cover some types of service that are not covered by
Medicare.  Medicaid beneficiaries who are also eligible for Medicare
have their liability for Medicare coinsurance and deductibles covered
by Medicaid and typically are covered for a number of services not
covered by Medicare, such as prescription drugs and long-term nursing
home care. 

   Figure 1:  Benefits for
   Medicare Beneficiaries
   Available Under Other Insurance
   Plans

   (See figure in printed
   edition.)

\a Medicaid covers all Medicare deductibles, coinsurance, and
premiums.  Also, Medicaid programs cover services not covered by
Medicare, such as prescription drugs. 

\b Employer-sponsored plans for retirees 65 years old or older and
Medigap policies typically cover all or a part of Medicare
deductibles and coinsurance for Medicare-covered services and may pay
for some services not covered by Medicare. 

\c Specified disease and hospital indemnity policies generally pay
fixed amounts that represent only a fraction of the cost of services
received. 

\d Long-term care policies typically pay a fixed amount per day when
a policyholder is in a nursing home or receiving home health care. 
These policies usually cover custodial care, whereas Medicare does
not cover custodial care. 

Because coverage provisions and benefit levels may vary from one
policy to another, specific plans must be compared to determine
whether duplication occurs, but as shown in figure 1, several types
of plans may duplicate one another.  For example, employer-sponsored
plans and Medigap policies cover many of the same benefits.  OBRA
1990 attempted to prevent duplication.  The law authorizes a fine of
up to $25,000 if someone knowingly sells a health insurance policy
that would duplicate benefits to which the prospective purchaser is
already entitled.  This prohibition is effective for policies issued
or sold after November 5, 1991. 


   EXTENT OF DUPLICATION
------------------------------------------------------------ Letter :4

In 1991, 86 percent of the 28 million elderly Medicare beneficiaries
had some form of additional health insurance.\6 The remaining 14
percent had no other health insurance.  Table 1 shows additional
health insurance coverage for elderly Medicare beneficiaries in 1991. 



                           Table 1
           
             Health Insurance Coverage of Elderly
                 Medicare Beneficiaries, 1991

                                           Number of
                                       beneficiaries  Percen
Type of health insurance\a               (thousands)       t
------------------------------------  --------------  ------
Medicare only                                  3,922      14
Medicare plus supplemental coverage           20,826      73
 through
An employer-sponsored plan                     7,902      28
An individually purchased plan\                8,910      31
Medicaid                                       2,674       9
Other or unknown source                        1,339       5
Medicare plus MULTIPLE additional              3,632      13
 coverage through
Two or more employer-sponsored plans             589       2
Two or more individually purchased               950       3
 plans
Employer-sponsored and individually            1,214       4
 purchased plans
Medicaid and employer-sponsored or               485       2
 individually purchased plans
Other or unknown sources                         393       1
============================================================
Total                                         28,380     100
------------------------------------------------------------
Note:  Numbers may not add to totals because of rounding. 

\a Individually purchased plans include Medigap and other insurance
that covers hospital and physician charges or prescription drugs, but
do not include hospital indemnity, specified disease, or long-term
care insurance. 

Source:  Derived by GAO from data in the 1991 Medicare Current
Beneficiary Survey, HCFA. 

About 13 percent of the Medicare beneficiaries (or 3.6 million
people) had multiple sources of additional insurance in 1991.  About
91 percent of those 3.6 million beneficiaries had 2 supplemental
plans; the other 9 percent had 3 or more supplemental plans.  Because
these people were covered under the more comprehensive supplemental
plans (Medigap, employer-
sponsored plans, and Medicaid), the potential for duplication is
great. 

We estimate that those Medicare beneficiaries (who did not also have
Medicaid) who paid premiums for their multiple plans spent about
$1.8 billion for potentially duplicate coverage in 1991; the Medicaid
beneficiaries paid about $190 million for unnecessary supplemental
insurance.  About 9 percent of the 3.6 million people with multiple
insurance policies received their coverage at no cost.\7

The HCFA survey showed that higher-income Medicare beneficiaries were
more likely to have multiple supplemental insurance policies than
lower-income beneficiaries.  This is shown in table 2. 



                                     Table 2
                     
                       Income of Medicare Beneficiaries and
                      Their Health Insurance Coverage, 1991


                                                               One
                                 Number of                              Multiple
                             beneficiaries  Medicare  supplemental  supplemental
Annual family income           (thousands)      only          plan         plans
--------------------------  --------------  --------  ------------  ------------
Up to $10,000                        8,458        22            70             8
$10,001-$20,000                      7,927        11            76            13
$20,001-$30,000                      4,051         7            78            15
Over $30,000                         4,283         5            75            20
Unknown                              3,661        18            70            12
--------------------------------------------------------------------------------
Source:  Derived by GAO from data in the 1991 Medicare Current
Beneficiary Survey, HCFA. 


--------------------
\6 The survey that is the source of the data reported in this section
did not inquire about hospital indemnity, specified disease, or
long-term care policies.  The sampling errors for estimates from this
survey are in appendix I. 

\7 In computing the estimate of unnecessary premiums for those
without Medicaid coverage we counted the premium paid for a second
and any additional supplemental plan as unnecessary.  We counted any
premium paid by a Medicaid beneficiary for a supplemental policy as
unnecessary. 


   PURCHASING MULTIPLE ADDITIONAL
   POLICIES IS UNNECESSARY
------------------------------------------------------------ Letter :5

Retirees enrolled in Medicare have little if any need to have more
than one comprehensive policy to supplement Medicare.  Hospital
indemnity and specified disease policies typically pay only a small
portion of the policyholder's costs for the services covered and
should not be viewed as a substitute for a more comprehensive
supplemental policy.  Beneficiaries do not need to purchase long-term
care policies with provisions that duplicate Medicare or Medigap
coverage.  Purchasing more than one comprehensive supplemental policy
entails substantial cost for little or no additional coverage. 


      LIMITED BENEFIT PLANS
---------------------------------------------------------- Letter :5.1

Hospital indemnity and specified disease plans pay amounts that are
not related to the cost of care received, and generally the payments
represent only a minor portion of those costs.  We consider these
plans to be poor substitutes for comprehensive health insurance
because of their limited economic value and the limited circumstances
under which benefits are paid.  We have assessed such limited benefit
plans in the past,\8 and the market has not changed enough since then
to change our opinion. 


--------------------
\8 See Health Insurance:  Hospital Indemnity and Specified Disease
Policies Are of Limited Value (GAO/HRD-88-93, July 12, 1988).  In
this report, we reported that the 5-year cumulative loss ratios (the
percentage of premiums returned to policyholders as benefits) for the
larger insurers in these lines ranged from 19 percent to 67 percent
over the period 1982-86.  Since our report was issued, there have
been no significant regulatory changes suggested by the National
Association of Insurance Commissioners affecting these products, and
1991 loss ratios for large insurers in these lines ranged from 35
percent to 79 percent. 


      LONG-TERM CARE POLICIES
---------------------------------------------------------- Letter :5.2

Medicare is not designed to cover long-term care but rather pays for
patients who need skilled nursing or physical or speech therapy on a
daily (for skilled nursing facility) or intermittent (for home health
care) basis.  However, most extended nursing facility stays and home
care involve services at a level lower than skilled care and thus do
not qualify for Medicare coverage. 

Medicare pays the full cost of covered skilled nursing facility stays
for the first 20 days and requires an $87-per-day coinsurance (in
1994) for the next 80 days, after which benefits end.  Medicare pays
the full cost of as many home health visits as meet its definition of
home health care.  Medigap policies, except for plans A and B, cover
Medicare coinsurance requirements for the 21st through the 100th day
of covered nursing home stays.  Medicare beneficiaries who are also
eligible for Medicaid would normally have their long-term care needs
paid by Medicaid. 

If a beneficiary intends to purchase a long-term care policy, he or
she should consider policies having longer waiting periods (for
example, up to 100 days) because Medicare or a combination of
Medicare and Medigap may cover short nursing home stays or the early
portion of longer stays.  However, policies with longer waiting
periods would require beneficiaries to pay out of pocket for services
that do not meet Medicare's coverage criteria. 


      COMPREHENSIVE SUPPLEMENTAL
      PLANS
---------------------------------------------------------- Letter :5.3

If a person is eligible for both Medicare and Medicaid, it is
extremely unlikely that he or she would need additional insurance. 
In fact, by federal law, Medigap insurers must allow a person to
suspend a Medigap policy when the person becomes eligible for
Medicaid and reinstate the policy if Medicaid eligibility ceases.\9

Purchasing more than one Medigap policy is also never necessary, and,
in fact, federal law prohibits knowingly selling a Medigap policy to
someone who already has one, unless the purchaser indicates in
writing his or her intent to replace existing coverage with the new
policy. 

In addition, employer-sponsored retiree plans generally provide
comprehensive Medicare supplement coverage, and most retirees covered
by such a plan would be wasting money if they purchased additional
health insurance.  We examined 192 employer-sponsored plans for
retirees 65 years old and older currently available from 142
employers.\10 We calculated what these employer-sponsored plans would
cover for a typical set of health services received in a year by a
beneficiary who is hospitalized once with a subsequent
Medicare-covered stay in a nursing home.\11 Our intention is to
illustrate how employer-sponsored retiree plans would supplement
Medicare across an array of services, including some services not
covered by Medicare. 

In this example, if a Medicare beneficiary received these services
during 1993, he or she would have incurred $3,345 in charges that
would not have been paid by Medicare.  On average, the 192
employer-sponsored plans would have paid $2,324 of those charges,
leaving the retiree responsible for $1,021. 

While facing some out-of-pocket expenses after the employer-sponsored
plan payments, a retiree would generally be better off to pay those
expenses than to try to obtain a Medigap policy as a supplement to an
employer-sponsored plan.  The result of purchasing a Medigap plan C
or J to supplement an employer-sponsored plan is illustrated in table
3.  Under both plans, the premiums for the Medigap policy exceed the
benefits that could be expected, and in our opinion, purchasing the
Medigap policy would be a waste of money. 



                           Table 3
           
           Additional Cost of Purchasing a Medigap
               Plan to Supplement an Employer-
                        Sponsored Plan


                                              Plan C  Plan J
--------------------------------------------  ------  ------
Annual premium for the Medigap plan (in         $780  $1,500
 1993)
Payment Medigap plan would make for charges     $670    $740
 left after the employer-sponsored plan's
 payment
Excess Medigap premiums over benefits           $110    $760
------------------------------------------------------------
\a We chose Ohio because it is a populous state with a large Medicare
population (seventh largest among the 50 states in 1991) and rates
for both plans C and J were within 1 percent of the median of all
rates nationwide for the company used in this illustration.  Figures
are rounded to the nearest $10. 

Of the 192 plans we reviewed, 17 percent were provided by the former
employer free of charge, and for 44 percent of the plans, the former
employer and retiree each paid a portion of the premiums.\12 Thus,
for over 60 percent of the plans, the retiree could obtain an
employer-sponsored plan free or at subsidized rates.  For 10 percent
of the plans, the retiree paid the full cost, and for the remaining
plans, those data were unavailable or we could not determine the
payment arrangement from the information provided to us.  (See app. 
IV for a summary of the principal features of the 192
employer-sponsored plans.)

While employer-sponsored plans can provide good coverage, we
concluded in a previous report\13 that employer-sponsored retiree
health benefits are not secure because employers have been changing
their health benefit plans for retirees.  Employers frequently
reserve the right to change health benefit plans at their discretion,
and plans negotiated under collective bargaining contracts may be
changed when those contracts are renegotiated.  Employers generally
cite rapidly rising costs as the reason for reducing health benefits. 
The recent changes to these health benefit plans have primarily
involved shifting costs to retirees, but a few employers have
terminated health plans for their retirees.  A recent nationwide
survey conducted by a benefits consulting firm reported that the
number of employers offering retiree health plans is continuing to
decline and that many employers who offer retiree coverage are ending
free coverage, increasing cost-sharing provisions, and tightening
eligibility requirements.\14

This trend is expected to continue, at least for the short term. 


--------------------
\9 42 U.S.C.  1395ss(q)(5)(A). 

\10 The number of plans exceeds the number of employers because some
employers offer more than one plan. 

\11 Appendix III presents the services and how we arrived at the
costs associated with each.  Most beneficiaries would not receive
this many services in any given year; only about 20 percent are
hospitalized in any year.  A small percentage of beneficiaries would
receive more services than those in our illustration. 

\12 The plan descriptions provided by employers generally did not
include current premiums for the plans. 

\13 See Retiree Health Plans:  Health Benefits Not Secure Under
Employer-Based System (GAO/HRD-93-125, July 9, 1993). 

\14 See Health Care Benefits Survey, Report 2, Retiree Health Care,
1992, A.  Foster Higgins & Co., Inc. 


   POTENTIAL PROBLEM FOR RETIREES
------------------------------------------------------------ Letter :6

Federal law effectively provides persons aged 65 or older a 6-month
"open season" after first enrolling in part B of Medicare during
which beneficiaries cannot be denied Medigap insurance because of
their health status.  As discussed in the previous section, given the
choice between retaining an employer-sponsored plan and purchasing a
Medigap plan, most retirees are probably better off selecting the
employer-sponsored plan.  However, the employer may subsequently
terminate the plan or future changes in cost sharing may make the
employer-sponsored plan less attractive, resulting in the retiree
deciding to replace his or her employer-sponsored plan with Medigap
insurance.  If either event occurs after the open season, the retiree
has lost the guaranteed access to Medigap insurance contained in the
law. 

Several alternatives exist that could alleviate potential problems in
changing from an employer-sponsored retiree plan to a Medigap policy
after the beneficiary's open season.  For example, federal Medigap
law could be amended to require insurers to offer policies to
retirees whose employer-sponsored plans are terminated or
substantially changed.  Also, the federal Medigap law could be
amended to require periodic open seasons.\15


--------------------
\15 A periodic open season for all Medigap policyholders could lead
to some adverse selection problems.  Such problems could occur if
policyholders switched to plans with more generous benefits in
anticipation of needing services and then switched back to less
generous plans during their next open season after the need was
satisfied or if they postponed purchasing a policy to older ages,
when the likelihood of health care use is higher. 


   CONCLUSION
------------------------------------------------------------ Letter :7

The Congress enacted a valuable protection for Medicare beneficiaries
in OBRA 1990 by amending Medigap requirements to prohibit duplicate
coverage.  Survey data show that (in 1991) about 13 percent of the
elderly Medicare population likely had purchased policies with
duplicate coverage, at a cost to them of about $2 billion in
premiums. 

However, the prohibition may have resulted in a dilemma for about
one-third of retirees, who must choose between retaining their
employer-sponsored supplemental plan or exercising their guaranteed
open season for purchasing a Medigap policy when they first enroll in
part B of Medicare.  If a retiree has an employer-sponsored plan
available, it is frequently his or her best option.  However, because
some companies have reduced the coverage offered retirees and this
trend is expected to continue, this source of supplemental insurance
is not secure. 


   MATTER FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :8

One-third of retirees get supplemental insurance through their former
employers.  If a Medicare beneficiary's plan is subsequently modified
or discontinued by the employer and the person desires to obtain a
different supplemental policy, the beneficiary will not be eligible
for the 6-month open enrollment period provided for persons who are
newly enrolled in Medicare part B.  Thus, obtaining an alternate
Medigap policy may not be possible.  For this reason, the Congress
may wish to consider amending the law to provide a mechanism for
retirees to obtain Medigap insurance when these circumstances occur. 


---------------------------------------------------------- Letter :8.1

This review was conducted from May 1992 to May 1994.  Except as noted
in appendix I, we did our work in accordance with generally accepted
government auditing standards.  We did not obtain agency comments
because this report is not concerned with the operation of a federal
agency or program. 

We will send copies of this report to interested parties and make
copies available to others on request. 

This report was prepared under the direction of Sarah F.  Jaggar,
Director of Health Financing and Policy Issues, who may be reached on
(202) 512-7119 if you have any questions.  Other major contributors
to this report are listed in appendix V. 

Janet L.  Shikles
Assistant Comptroller General


SCOPE AND METHODOLOGY
=========================================================== Appendix I

SCOPE

We identified 335 companies who indicated in their response to an
earlier GAO survey that they provided health benefits to retirees
eligible for Medicare.  We supplemented this selection with an
additional 23 large employers that offered retiree health plans.  We
asked these 358 companies to send us descriptions of their current
health benefit plan(s) for retirees.  Two hundred sixty-two companies
responded, and 142 of them provided information on their plans. 
Because some companies offer more than 1 plan, we had descriptions on
a total of 192 retiree health plans.  The remaining 120 companies
responded that they do not provide health benefits to retirees, or
the information they provided was incomplete.  We abstracted data
describing each of the 192 health benefit plans and summarized their
features.  (See app.  IV.)

METHODOLOGY

To identify areas of potential duplication, we reviewed our prior
reports and studies conducted by benefit consultants and other
researchers.  We supplemented these studies by reviewing and
comparing the benefits offered by the standard Medigap combinations,
Medicaid, and private plans, such as employer-sponsored, long-term
care, specified disease, and hospital indemnity plans. 

To assess the extent of potential duplication, we obtained the
computerized results of round one of the Health Care Financing
Administration's Medicare Current Beneficiary Survey.  This is a
continuous, multipurpose survey of a representative sample of the
Medicare population.  Round one interviews were conducted in the last
4 months of calendar year 1991.  These interviews captured baseline
information on a sample of 12,677 Medicare beneficiaries, including
information on supplemental coverage from private insurance and
Medicaid.  For purposes of HCFA's survey, private insurance included
an individually purchased plan (usually referred to as Medigap
insurance), health plans from former employers, and other plans that
may cover hospital, physician, or drug charges, but HCFA's survey did
not include long-term care, hospital indemnity, or specified disease
insurance.  We analyzed the survey data for the 10,154 Medicare
beneficiaries who were 65 years of age and older, excluding those who
have employer-sponsored health coverage through a current employer. 
We did not verify the accuracy of the information in the computerized
file. 

To assess the need for additional insurance coverage, we calculated
the benefits that each of the 192 employer-sponsored retiree health
benefit plans would pay under a set of standardized charges for
certain medical services.  (See app.  III.)


      SAMPLING ERRORS
------------------------------------------------------- Appendix I:0.1

Data reported in tables 1 and 2 are derived from the Medicare Current
Beneficiary Survey.  Because these are derived from a sample, each
estimate has a sampling error associated with it.  The size of the
sampling error reflects the precision of the estimate; the smaller
the sampling error, the more precise the estimate.  We computed
sampling errors for tables 1 and 2 at the 95-percent confidence
level.  This means that the chances are about 95 out of 100 that the
actual number or percentage being estimated falls within the range
defined by our estimate, plus or minus the sampling error.  The
sampling errors for tables 1 and 2 are in tables I.1 and I.2. 



                          Table I.1
           
           Point Estimates and Sampling Errors for
             Health Insurance Coverage of Elderly
                 Medicare Beneficiaries, 1991

                                           Number of
                                       beneficiaries  Percen
Type of health insurance                 (thousands)       t
------------------------------------  --------------  ------
Medicare only                            3,922 � 273    14 �
                                                         1.0
Medicare plus supplemental coverage     20,826 � 321    73 �
 through                                                 1.1
An employer-sponsored plan               7,902 � 428    28 �
                                                         1.5
An individually purchased                8,910 � 404    31 �
 plan                                                    1.4
Medicaid                                 2,674 � 218     9 �
                                                         0.8
Other or unknown source                  1,339 � 135     5 �
                                                         0.5
Medicare plus MULTIPLE additional        3,632 � 241    13 �
 coverage through                                        0.8
Two or more employer-sponsored plans       589 � 105     2 �
                                                         0.4
Two or more individually purchased         950 � 133     3 �
 plans                                                   0.5
Employer-sponsored and individually      1,214 � 145     4 �
 purchased plans                                         0.5
Medicaid and employer-sponsored or          485 � 86     2 �
 individually purchased plans                            0.3
Other or unknown sources                    393 � 77     1 �
                                                         0.3
============================================================
Total                                   28,380 � 171     100
------------------------------------------------------------
Note:  Numbers may not add to totals because of rounding.  Sampling
errors are computed at the 95-percent confidence level. 



                                    Table I.2
                     
                      Point Estimates and Sampling Errors of
                     Medicare Beneficiaries and Their Health
                             Insurance Coverage, 1991


                                 Number of                     One      Multiple
                             beneficiaries  Medicare  supplemental  supplemental
Annual family income           (thousands)      only          plan         plans
--------------------------  --------------  --------  ------------  ------------
Up to $10,000                  8,458 � 401  22 � 1.7      70 � 1.5       8 � 1.0
$10,001-$20,000                7,927 � 320  11 � 1.7      76 � 1.9      13 � 1.5
$20,001-$30,000                4,051 � 216   7 � 1.5      78 � 2.6      15 � 2.0
Over $30,000                   4,283 � 340   5 � 1.2      75 � 2.5      20 � 2.2
Unknown                        3,661 � 265  18 � 1.9      70 � 2.7      12 � 2.0
--------------------------------------------------------------------------------
Note:  Sampling errors are computed at the 95-percent confidence
level. 

In addition, the percentage estimates in the text on pages 6 through
8 have sampling errors ranging from � 1 percent to � 1.9 percent, and
the dollar estimates in the text from page 7 have the following
sampling errors: 

  beneficiaries who did not also have Medicaid paid about $1.8
     billion � $0.2 billion for potentially duplicate coverage in
     1991 and

  Medicaid beneficiaries paid about $190 million � $58 million for
     duplicate coverage in 1991. 


FEATURES OF STANDARDIZED MEDICARE
SUPPLEMENT PLANS
========================================================== Appendix II

In 1991, the National Association of Insurance Commissioners approved
the following 10 standardized benefit combinations for Medicare
supplement policies.  Forty-four states, the District of Columbia,
Puerto Rico, and the Virgin Islands approved all 10 plans. 
Pennsylvania and Vermont approved 7; Delaware approved 6; and
Massachusetts, Minnesota, and Wisconsin had alternative
simplification programs in effect and have waivers from these
standard plans.  Benefits included in a plan are marked by "X."



                                    Table II.1
                     
                     Benefit Combinations of the Standardized
                            Medicare Supplement Plans

             Plan   Plan   Plan   Plan   Plan   Plan   Plan   Plan   Plan   Plan
                A      B      C      D      E      F      G      H      I      J
----------  -----  -----  -----  -----  -----  -----  -----  -----  -----  -----
Basic           X      X      X      X      X      X      X      X      X      X
 benefits\a
Skilled                       X      X      X      X      X      X      X      X
 nursing
 facility
 coinsuran
 ce
Part A                 X      X      X      X      X      X      X      X      X
 deductible
Part B                        X                    X                           X
 deductible
Part B                                             X    X\c             X      X
 excess
 charges\b
Foreign                       X      X      X      X      X      X      X      X
 travel
 emergency
At-home                              X                    X             X      X
 recovery
Prescripti                                                     X\d    X\d    X\e
 on drugs
Preventive                                  X                                  X
 medical
 care
--------------------------------------------------------------------------------
\a Basic benefits pay the beneficiary's Medicare part B coinsurance
(generally 20 percent of Medicare-approved charges after the $100
annual deductible), part A coinsurance for the 61st--90th day of a
Medicare-covered hospital stay, part A coinsurance during the use of
a beneficiary's 60 lifetime reserve days, eligible expenses after a
beneficiary's hospital benefits are exhausted up to a lifetime
maximum of 365 days, and parts A and B blood deductible (3 pints). 

\b Part B excess charges are the difference between the actual charge
for a service or item and the Medicare-allowed charge for that
service or item.  Medicare prohibits charging more than 115 percent
of the Medicare-allowed charge. 

\c This plan pays 80 percent of Part B excess charges. 

\d Prescription drug coverage under plans H and I requires an annual
deductible of $250, then the plan pays 50 percent of covered charges,
up to a maximum plan payment of $1,250 per year. 

\e Prescription drug coverage under plan J requires an annual
deductible of $250, then the plan pays 50 percent of covered charges,
up to a maximum plan payment of $3,000 per year. 


SUMMARY OF COVERAGE OF TYPICAL
HEALTH SERVICES BY
EMPLOYER-SPONSORED RETIREE HEALTH
PLANS
========================================================= Appendix III

To assess the need for insurance in addition to an employer-sponsored
plan, we constructed a set of typical health services that a Medicare
beneficiary might receive during a year if the beneficiary was
hospitalized and had a subsequent Medicare-covered stay in a nursing
home.  In addition to the hospital and nursing home stay, these
services included physician charges and some other outpatient
services, including routine preventive services and services not
covered by Medicare.  Most beneficiaries would not receive all these
services in any given year; for example, only about 20 percent of
Medicare beneficiaries are hospitalized in any year.  Conversely, a
small percentage of beneficiaries would receive more services than
those in our illustration.  We then calculated what Medicare would
pay for those services, what each of the 192 employer-sponsored plans
would pay, and how much would remain for the beneficiary to pay. 



                                   Table III.1
                     
                       Health Services and Charges Used for
                     Calculating Benefits Under Medicare and
                             Employer-Sponsored Plans


                                   Beneficiary's
                                obligation after
                                Medicare payment
                     Typical           (based on   Average payment  Beneficiary'
                      charge          allowances      by employer-   s remaining
Health service       or term            in 1993)   sponsored plans    obligation
--------------  ------------  ------------------  ----------------  ------------
Inpatient             9 days               $ 676             $ 393         $ 283
 hospital
 stay\a
Physician              $900\                 260               140           120
 office visit
 charges\b
Physician            $1,365\                 273               175            98
 hospital
 visit
 charges\b
Physician         Up to $340                 340               264            76
 charges in
 excess of
 Medicare
 allowed
 amounts\c
Outpatient            $1,000               1,000               797           203
 prescription
 drugs\d
Outpatient X-           $100                  20                14             6
 ray\d
Routine dental          $100                 100                23            77
 checkup\d
Medicare-            28 days                 676               517           159
 approved
 skilled
 nursing
 facility
 stay\e
================================================================================
Total                                     $3,345            $2,324        $1,021
--------------------------------------------------------------------------------
Note:  Numbers may not add to totals because of rounding. 

\a The 9 days for hospital stays was the average for short-stay
hospital discharges in 1991, reported by HCFA's Bureau of Data
Management and Strategy. 

\b Some employer-sponsored plans pay different amounts for physician
services in the office than in a hospital, but Medicare would have
paid 80 percent of allowed charges in either setting.  The charges of
$900 and $1,365 for physician office and hospital visits were
computed from Medicare reimbursement and utilization data we obtained
from HCFA's Office of the Actuary.  The dollar amounts are based on
Medicare reimbursements for aged beneficiaries who had an inpatient
hospital stay during calendar year 1991, updated to 1993 dollars with
inflation factors provided by HCFA.  The beneficiary's obligation
after Medicare payment assumes that the part B deductible ($100) was
applied to the office visit charges.  (Beneficiary's obligation is
computed as $100 deductible plus 20 percent of $800.)

\c Under payment provisions contained in the Omnibus Budget
Reconciliation Act of 1986, physicians could not charge Medicare
beneficiaries more than 115 percent of Medicare-approved amounts for
their services in 1993.  This limit applies regardless of the
setting, so the limit above Medicare-approved charges was 15 percent
of ($900 + $1,365), or $339.75, which we rounded up to $340. 

\d Readily available sources did not contain data for prescription
drugs, X-rays, and routine dental checkup.  The amounts used are our
estimates based on various data sources. 

\e The 28-day stay in a skilled nursing facility was the average
length of a Medicare-covered stay in 1991, obtained from HCFA's
Office of Research and Demonstrations. 


PRINCIPAL FEATURES OF
EMPLOYER-SPONSORED RETIREE HEALTH
PLANS
========================================================== Appendix IV

The 192 employer-sponsored retiree health plans we reviewed covered a
broad range of health-related services.  Several common services and
the number of plans covering the services are listed in table IV.1. 
Many employer-sponsored plans covered services not covered by
Medicare.  Almost all employer-sponsored plans covered outpatient
prescription drugs.\1 About one quarter covered routine vision and
dental care. 



                          Table IV.1
           
              Benefits Available Under Employer-
                Sponsored Retiree Health Plans


                                                     Percent
                                                     (of 192
Benefit                                   Number      plans)
----------------------------------------  ------  ----------
Hospital services                            192         100
Physician services                           192         100
Laboratory and X-ray services                192         100
Skilled nursing facility care                179          93
Home health care                             158          82
Hospice care                                 128          67
Outpatient prescription drugs                180          94
Vision care                                   52          27
Dental care                                   57          30
------------------------------------------------------------

The employer-sponsored plans commonly apply financial limits to their
benefits.  These include deductibles, coinsurance, and lifetime
maximum benefits.  Some plans also include out-of-pocket maximums, or
catastrophic benefits, and these plans will pay all covered expenses
for the beneficiary after the out-of-pocket maximum is reached, up to
the policy maximum.  The financial limits of the 192 plans we
reviewed are summarized in table IV.2.



                          Table IV.2
           
            Principal Financial Characteristics of
             Employer-Sponsored Health Plans for
                           Retirees


                          Number
Employer-sponsored            of  Minimu
plan characteristic      plans\a       m   Maximum    Median
----------------------  --------  ------  --------  --------
Annual deductible per      161\b     $20    $5,000      $200
 covered person
Percentage of covered        170     70%      100%       80%
 charges paid after
 the deductible is
 met\
Annual out-of-pocket         138    $250   $10,000    $1,000
 limit
Lifetime maximum             125  $20,00  $2,000,0  $1,000,0
 benefit                               0        00        00
------------------------------------------------------------
\a Represents number of plans (out of 192) for which data were
available.  The remaining plans may or may not include the
characteristic. 

\b For nine additional plans, there was no deductible or the
deductible varied depending on the retiree's salary or years of
service. 

The predominant form of employer-sponsored plan was a conventional
fee-for-service plan.  Under this arrangement, the beneficiary
selects the provider and submits claims for reimbursement for
charges, to be paid to the beneficiary or to the provider on behalf
of the beneficiary.  About one-quarter of the plans were network
plans, such as health maintenance or preferred provider
organizations.  Under network plans, the beneficiary is encouraged to
obtain services through the organization.  Obtaining services outside
the network will generally cost the beneficiary more than those same
services within the network.  (See table IV.3.)

For most elderly retirees, Medicare is their primary health insurer;
employer-sponsored plans are secondary sources.  Employer-sponsored
plans exhibited four methods of integrating their benefits with
Medicare:  carve-out, exclusion, Medicare supplemental (Medigap), and
coordination of benefits.  Under carve-out, the employer-sponsored
plan calculates what the plan would pay without Medicare coverage,
then Medicare benefits are subtracted from the employer-sponsored
plan amount, and the plan pays the remaining amount, if any.  Under
exclusion, Medicare benefits are subtracted from the total claim and
employer-sponsored plan benefits are calculated on the remainder. 
Medigap plans typically pay Medicare coinsurance and may cover
Medicare deductibles.  Under coordination of benefits, the plan pays
the difference between Medicare payments and the actual charges, up
to the amount the plan would have paid in the absence of Medicare. 
Among these four, carve-out is the least advantageous to the retiree,
and coordination of benefits is the most advantageous.  The incidence
of each type is shown in table IV.3.



                          Table IV.3
           
            Principal Nonfinancial Characteristics
            of Employer-Sponsored Health Plans for
                           Retirees

Employer-sponsored plan              Number of    Percent of
characteristic                           plans         plans
--------------------------------  ------------  ------------
Type of plan
------------------------------------------------------------
Conventional fee-for-service               140            73
Network                                     47            24
Combination                                  5             3
============================================================
Total                                      192           100

Method of integration with Medicare
------------------------------------------------------------
Carve-out                                   96            50
Exclusion                                   38            20
Medigap                                     22            11
Coordination of benefits                     6             3
Other\a                                     30            16
============================================================
Total                                      192           100
------------------------------------------------------------
\a Includes plans that are health maintenance organizations and plans
that use a mixture of integration methods (for example, carve-out for
some services and exclusion for others). 

The differences in plan payments can be substantial, as illustrated
in table IV.4, which shows how an employer-sponsored plan would pay
the same Medicare part B claim under the four different integration
methods.  This example assumes a Medicare part B medical expense
claim with total Medicare-approved charges of $1,000 and the
employer-sponsored plan has an annual deductible of $200 and pays 75
percent of covered charges after the deductible is met.  Medicare
would pay $720 of the approved charges ($1,000 minus $100 deductible,
or $900, times 80 percent), leaving a balance of $280 to be paid by
the retiree and employer-sponsored plan.



                          Table IV.4
           
            Comparison of Employer-Sponsored Plan
               Payments Under Common Methods of
              Integrating Benefits With Medicare



Method of                                         Coordinati
integrating with        Carve-  Exclusio  Mediga       on of
Medicare                   out         n       p    benefits
--------------------  --------  --------  ------  ----------
Employer-sponsored      $600\a       N/A     N/A      $600\a
 plan payment in the
 absence of Medicare
Actual employer-           0\b     $60\c  $180\d      $280\e
 sponsored plan
 payment
Retiree's out-of-         $280      $220    $100           0
 pocket costs
------------------------------------------------------------
\a Computed as ($1,000 minus $200 plan deductible) times 75 percent. 

\b The Medicare payment exceeds employer-sponsored plan payment in
the absence of Medicare, so the plan pays nothing. 

\c Computed as (($1,000 minus $720) minus $200 plan deductible) times
75 percent. 

\d Assumes the Medigap plan pays Medicare part B coinsurance but not
the deductible.  This plan pays ($1,000 minus $100 Medicare annual
deductible) times 20 percent. 

\e The amount remaining after the Medicare payment is less than what
the employer-sponsored plan would pay in the absence of Medicare, so
the plan pays what remains after the Medicare payment, consisting of
the retiree's Medicare part B deductible and coinsurance ($100 plus
20 percent of $900). 


--------------------
\1 Medicare provides narrow coverage of outpatient prescription
drugs, such as immunosuppressive outpatient prescription drugs
following transplant surgery and certain oral cancer drugs. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

Thomas Dowdal, Assistant Director, (410) 965-8021
William Hamilton, Evaluator-in-Charge
Jerry Baugher
Marilyn Fisher
Frank Foley
Roger Hultgren
Stephen Jones
Michael Stepek