Medigap Drives Up Medicare Costs, Study Finds

Supplemental coverage plans that shield enrollees from cost-sharing increase drive up medical utilization and, subsequently, Medicare spending, according to a study conducted by researchers at the University of Texas and the University of Chicago.

University of Texas Department of Economics Assistant Professor Marika Cabral, PhD, and University of Chicago Assistant Professor of Economics Neale Mahoney, PhD, examined how enrollment in Medigap plans — supplemental Medicare policies administered by private health insurers — affects Medicare beneficiaries' utilization of healthcare services and individual spending.

Medigap enrollees pay a flat premium in exchange for little or no cost-sharing for healthcare services. By contrast, traditional Medicare coverage controls utilization through cost-sharing mechanisms such as an approximately $1,000 deductible for each hospital admission and 20 percent coinsurance for physician office visits.

Drs. Cabral and Mahoney found enrollment in Medigap increases the number of Medicare Part B physician services claims by 33.7 percent and Part A hospital stays by 23.9 percent. As a result, Medigap increases an individual's Medicare spending by $1,396 per year (22.2 percent).

The researchers also found a 15 percent tax on Medigap premiums would decrease Medigap coverage by 13 percentage points and reduce net government cost by 4.3 percent per beneficiary. However, they emphasize that taxation isn't the only way to cut Medigap spending. For instance, eliminating Medigap and reforming Medicare to include an annual out-of-pocket maximum could offer beneficiaries nearly the same risk protection as Medigap without the higher utilization, according to the study.

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