James Sullivan
James Sullivan

Medicare Participants Out-of-Pocket Healthcare Costs on the Rise

Congress and policymakers look to increased cost sharing to reduce Medicare deficit.

July 19, 2010
by James Sullivan, CPA, PFS

For years, Medicare Supplement Insurance (Medigap) policies drew little attention from advisors. But three key events in 2010 should serve to focus CPA advisors’ attention on Medigap policies:

  • On June 1st, Medigap plans were “modernized” with several plans eliminated and two new plans added.

  • A little noticed provision in the Patient Protection and Affordable Care Act of 2010 (PPACA) will increase cost sharing by Medicare participants selecting Plan C or Plan F.
  • The Medicare Payment Advisory Commission’s (MedPAC) June 2010 report to Congress recommended significant changes to traditional Medicare’s benefit design. Many of these recommendations will impact the design of Medigap policies.

Advisors working with the elderly must be aware of both the short-term and long-term implication of these changes on their clients. These changes will impact not only the cost paid by the participant but also how care is delivered. As Congress struggles with Medicare’s enormous unfunded liability, the design of the Medigap policies will also serve as a bellwether to the changes Congress will make to the underlying coverage provided by Medicare.

Medigap insurance policies are private health insurance policies sold to Medicare participants. In exchange for an additional monthly premium, the policies are designed to pay some or all of the healthcare costs (or gaps) not covered by Medicare. For example, Medicare Part B pays only 80 percent of a participant’s doctor bills. The Medicare beneficiary is responsible for paying the remaining 20 percent. If the Medicare participant chooses to purchase a Medigap insurance policy, some or all of the 20 percent co-insurance amount will be paid.

Several different types of Medigap policies are offered. To make it easier for seniors to shop for a policy, the benefits were standardized by Congress in the early 1990s. Each policy offering the same benefits is designated by a letter from A through N (plans E, H, I, J may no longer be sold after May 31, 2010). The only difference between a Plan F offered by 2 different companies will be the price — the benefits will be exactly the same. This makes it much easier for seniors shopping for a policy.

Medigap Modernization

On June 1, Medigap plans M and N were introduced. Neither plan will cover the Part B annual deductible ($155 in 2010). Plan M will cover only 50 percent of the Part A deductible (in 2010 the Medicare participant pays the first $1,100 of the cost of a hospital stay); Plan N will cover 100 percent of the Part A deductible. Plan N, however, requires a copayment of up to $20 for doctor office visits and up to $50 for emergency room visits. While these payments may seem small, the expectation is that the payments will make Medicare participants more sensitive to the cost of seeing their doctor and reduce the number of unnecessary doctor office visits.

In exchange for additional cost sharing by the Medigap policyholder, Plan M and N have lower monthly premiums when compared to other Medigap policies. For example, the cost of Plan F (one of the most popular plans) from Blue Cross Blue Shield of Illinois for an 88-year-old is $275. The monthly premium for Plan N is $193 for a monthly savings of $82; an annual savings of $984. For a healthy 88-year-old the savings in premiums will be more than the cost of the doctor office copay and the cost of the Part B annual deductible. If the Plan N participant goes to the doctor 4 times per year the total copay will be $80 ($20 times four). Adding the annual deductible of $155 results in addition cost sharing of $235 compared to $984 in premium savings. Of course, there will be circumstances when an analysis shows that an 88-year-old with significant health problems is better off financially by remaining in Plan F.

Advisors can provide their clients an immediate service by reviewing their current Medigap coverage and, if it makes sense, recommend the client change plans.

PPACA of 2010

Medigap policies must follow Federal as well as state laws. The benefit standards are created by the National Association of Insurance Commissioners (NAIC). These standards are then adopted by the states. In the PPACA Congress directed the Health and Human Services secretary to request that the NAIC review and revise the benefit standards for Medigap Plan C and Plan F. Specifically, NAIC is instructed to revise the standards of C and F to introduce requirements for nominal cost sharing under Part B.

Why is this important? First, Plan C and Plan F are the two most popular Medigap plans offering rich benefit packages (55% of all Medicare beneficiaries who purchase a Medigap policy are in one of these policies). Second, Plans C and F are the only two policies now sold that pay all the coinsurance and copayments under Medicare:

  • Part A hospital stay deductible ($1,100 in 2010);
  • Part B annual deductible ($155 in 2010);
  • Part B coinsurance or copayment (20 percent of covered amounts); and
  • Medicare Part A hospital co-insurance amount ($275 per day for days 61 – 90; $550 per day for days 91 – 150).

Congress recognizes that even nominal cost sharing by beneficiaries reduces their use of covered health care services. By making this change, the expectation is that participants will make fewer inappropriate visits to their doctor’s office and reduce overall Medicare costs.
Implementation of these changes must be made by January 1, 2015.
MedPAC’s Report to Congress

MedPAC is an independent Congressional agency. It advises Congress on issues impacting the Medicare program. MedPAC is charged with analyzing access to care, quality of care and other issues. It issues two reports to Congress each year. Its June 2010 report is entitled Report to the Congress: Aligning Incentives in Medicare.

The report states:

“… that when elderly beneficiaries are insured against Medicare’s cost-sharing requirements, they use more care and Medicare spends more on them.”

MedPAC argues that copayments can be used to encourage certain types of behavior (for example, low or no copayments for preventive health services will result in more participants seeking such services) and discourage other behaviors (such as frequent, unnecessary trips to the doctor’s office). For this reason, it recommends that Medigap plans not be allowed to fill in “fixed-dollar copayment amounts for services such as office visits and use of hospital emergency rooms.”


Medigap modernization, PPACA and the MedPAC report all have a common theme: Medicare participants’ cost sharing will continue to increase. In the short term, advisors should be discussing the June 1st changes to Medigap plans with their clients. In the long term, Congress and policy-makers understand that future nominal increases in the participants’ out-of-pocket healthcare expenditures impact behavior and will decrease the Medicare deficit. Now that Medigap plans are in the crosshairs the changes to these plans are just beginning. Given the size of the Medicare unfunded liability, the increases in cost sharing may ultimately be more than just “nominal.”

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James Sullivan, CPA, PFS, MAS, is an investment counselor at Core Capital Solutions LLC. He has almost 25 years of experience in individual tax, investing and personal financial planning. Before joining Core Capital Solutions, Sullivan spent 20 years at Arthur Andersen LLP. He is a member of the AICPA PrimePlus/ElderCare Task Force.

PFP Section members, including PFS credential holders will benefit from additional Medicare resources in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp. Non-members can click here to join the section.