Medigap Insurance: Plans Are Widely Available but Have Limited Benefits and May Have High Costs

To protect themselves against large out-of-pocket expenses and help fill gaps in Medicare coverage, most beneficiaries buy supplemental insurance, known as Medigap; contribute to employer-sponsored health benefits to supplement Medicare coverage; or enroll in private Medicare+Choice plans rather than traditional fee-for-service Medicare. Because Medicare+Choice plans are not available everywhere and many employers do not offer retiree health benefits, Medigap is sometimes the only supplemental insurance option available to seniors. Medicare beneficiaries who buy Medigap plans have coverage for essentially all major Medicare cost-sharing requirements, including coinsurance and deductibles. But this "first-dollar" coverage may undermine incentives for prudent use of Medicare services, which could ultimately boost costs for the Medicare program. Although various proposals have been made to add a prescription drug benefit to Medicare, relatively few beneficiaries buy standardized Medigap plans with this benefit. Low enrollment in these plans may be due to the fact that fewer plans are being marketed with these benefits; their relatively high cost; and the limited nature of their prescription drug benefit, which still requires beneficiaries to pay more than half of their prescription drug costs. Most plans have a $3,000 cap on benefits. As a result, Medigap beneficiaries with prescription drug coverage continue to incur substantial out-of-pocket expenses for prescription drugs and other health care services.