Transparency Should Apply To All Forms Of Medicare Insurance

In various committee hearings and markups, Congress continues exploring actions to expand transparency for health care consumers. Such measures hold the potential to give patients the information they need to select their health care options wisely, generating competition that can bring down costs.

However, the success of transparency efforts depends upon those measures getting applied evenly and broadly. When it comes to Medicare, that means Congress should ensure seniors have information on all types of insurance policies they can purchase.

Recently, the House Ways and Means Committee marked up several pieces of health-related legislation. Among the bills the committee approved was H.R. 9644, the Medicare Advantage MLR Transparency Act.

“MLR” refers to the medical loss ratio — the percentage of premium dollars spent on delivering health care benefits, as opposed to administrative overhead and profit. Under the reconciliation law Democrats passed in 2010 to “fix” Obamacare, Medicare Advantage and Medicare Part D prescription drug plans already have a minimum requirement for an 85 percent MLR — that is, they may spend no more than 15 cents of every premium dollar on overhead and profits.

While insurers already report their MLR information, they do not widely publicize those data. H.R. 9644 would require public online reporting of MLR data “in a consumer-friendly format,” as part of a package of information Medicare Advantage insurers would be required to disclose. In supporting the proposal, House Ways and Means Committee Chairman Jason Smith, R-Mo., claimed that “seniors and taxpayers deserve to know this information before they hand over their money.”

But the legislation does not apply the new MLR transparency requirements to stand-alone Medicare Part D plans or to Medigap (i.e., Medicare supplemental) insurance. Many seniors enrolled in traditional Medicare (as opposed to Medicare Advantage) purchase Medigap plans to offset the cost of expenses that traditional Medicare does not cover.

Congress shouldn’t exempt Part D and Medigap plans from MLR transparency. For starters, Medigap is an inefficient form of health insurance — in fact, many conservatives would argue that most Medigap coverage isn’t really insurance at all.

In many cases, Medigap plans represent not “insurance” — that is, financial protection in the event of an unplanned, catastrophic event like a heart attack — but pre-paid health care. Many seniors purchase Medigap coverage because they do not like paying the 20 percent co-insurance that traditional Medicare requires for many services.

That dynamic makes Medigap coverage inefficient on two levels. When most Medigap claims are for comparatively minor matters — for instance, the beneficiary’s share of a physician visit, which might come to $20 or $30 — administrative and overhead costs will eat up a larger share of premium dollars. That explains why Medigap plans have a minimum medical loss ratio of 65%, versus an 85 percent required MLR for Medicare Advantage plans.

Just as important: Because Medigap coverage insulates beneficiaries from the cost-sharing that traditional Medicare normally charges, it encourages seniors to over-consume care in ways that raise expenses to Medicare (meaning taxpayers). Put more simply, Medigap represents yet another example of how expensive health care gets when it’s “free.”

A 2011 paper by the Kaiser Family Foundation quantified the cost of these inefficiencies. The analysis concluded that reforming Medigap plans to require greater beneficiary cost-sharing would actually save money for seniors and the Medicare program. Nearly four in five (79%) Medicare beneficiaries would pay less — an average of $416 less per year, even after taking into account higher out-of-pocket spending on co-payments and deductibles — while Medicare program spending itself would fall by $4.6 billion annually. (Both numbers would likely be higher at 2026 spending levels.) The savings would come because 1) fewer premium dollars would get run through inefficient Medigap insurers and 2) seniors would spend less money consuming “free,” but marginally useful or even harmful, health services.

Making clear how much of seniors’ Medigap premium dollars go towards actual health expenses would also highlight the questionable business practices of one of the nation’s largest senior organizations. To wit, it would illustrate to seniors how much they personally pay due to the unholy alliance between AARP and UnitedHealth Group, the nation’s largest insurer.

As I have outlined in a series of reports for American Commitment, AARP makes most of its revenue not from membership dues, but from “royalty fees” associated with selling products to seniors. The largest share of AARP’s “royalty fees” comes from UnitedHealth, and its Medigap plan brings with it a particularly pernicious twist.

When it comes to the AARP-UnitedHealth Medigap offering, AARP’s “royalty fee” equals 5.95 percent of each premium dollar paid. The arrangement means that AARP has an incentive to sell Medigap plans that seniors may not want or need, and to sell the most expensive plans available. It also gives AARP an incentive to raise rather than lower premiums, because AARP wins — it generates more “royalty fees” — when seniors lose by paying more out-of-pocket for their coverage.

At the time Obamacare passed, many conservative policy experts — including this one — argued that the medical loss ratio provisions would encourage premium increases. If the law caps profits as a percentage of premium dollars, then insurers can only raise their profits by raising premiums, as 15 percent profit on a $200 monthly premium obviously exceeds a 15 percent profit on a $100 premium.

That said, Congress has shown little desire to repeal the MLR provision (or, for that matter, any other element of Obamacare). If Washington intends to retain the metric, then lawmakers should ensure that consumers have ways to access that information as one potential data point regarding their insurance plan’s value. And if Congress wants to require disclosure of Medicare Advantage plans’ MLR, then it should do the same for Medigap and Part D plans too.

Extending Medicare Advantage transparency requirements in H.R. 9644 to Medigap supplemental insurance would have several salutary effects. It would show seniors how much of their premium dollar goes to waste, in the form of administrative overhead, rather than paying for health care expenses. It would also help to expose how one of the largest Medigap plans, AARP/UnitedHealth, overcharges seniors to line AARP’s bottom line.

At worst this transparency might prompt insurers to become more efficient — and for AARP to practice what it preaches, both with regards to transparency and serving seniors’ interests (as opposed to AARP’s bottom line). At best, it could encourage seniors to ditch Medigap coverage entirely, which might result in lower costs for the Medicare program. In any event, it’s a no-lose proposition, one that Congress should embrace sooner rather than later.