Standardized Choices: Medigap Lessons for Medicare Part D

Publication Date: March 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Health

Type:

Abstract:

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (P.L. 108-173, known as "MMA") created a new Medicare outpatient prescription drug benefit. With the rollout of the full benefit in January 2006, beneficiaries face a large number of choices from numerous insurers offering multiple plans with different benefits. A similarly complex array of choices in the private supplemental Medicare insurance (Medigap) market was one of the factors leading to the Medigap provisions in the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508, OBRA 90) and the Social Security Act Amendments of 1994 (P.L. 103-432, SSAA 94).

The Medigap reforms addressed the problems in the market by: (1) simplifying choices, (2) promoting competition as a means to hold down premium increases, and (3) providing consumer protections. To reduce the variation and number of products in the market, OBRA 90 limited insurers to selling ten standardized policies with precisely defined benefits.

The ten standardized policies simplified price comparisons and decision making for Medicare beneficiaries and led to a consolidation in the market with fewer products and sellers, however some problems remained. Premium increases continued, critics expressed dissatisfaction with the range of offerings, claiming that the limited choices did not fully meet the needs of some beneficiaries, and confusion persisted in some of the dimensions that were not addressed by the Medigap reforms, for instance in the methodology used to calculate premium increases over time.

There are several differences between the Medigap experience and Medicare Part D when considering whether standardizing benefits might yield improvements in the Part D market. In contrast to Medigap, Medicare Part D is new and the market is likely to change dramatically in the coming years. Many observers expect that the Medicare Part D market will consolidate in subsequent years, both in the number of carriers and the number and scope of products offered, as carriers learn which products are most attractive to Medicare beneficiaries and which ones are profitable. A strong federal presence in Medicare Part D and the additional complexities of a prescription drug benefit when compared to a supplemental insurance product also suggest that the experiences might not be entirely similar. Consequently, the policy decision should include considerations about not only whether and how to standardize benefits but also when to do so.