Coming to Grips With Health-Care Issues : Federal Law Aims to Stop Abuses in Medigap Coverage for Elderly

An important measure added to the 1991 federal budget legislation just before it passed last week is meant to help clean up abuses in the $15-billion-a-year business of selling private insurance to elderly people seeking coverage for medical costs not paid by Medicare.

The legislation, covering so-called Medigap insurance, seeks, among other provisions, to set up 10 standard policies with a core group of basic benefits to replace the thousands of often-confusing and difficult-to-compare policies now bought by more than 20 million people.

The Medigap insurance business has been rife with abuses, such as misleading and outright false promises of coverage, for years, according to consumer groups and advocates for the elderly. States normally regulate health insurance, but activists say Medigap abuses have flourished because of lax regulation by some states. The federal legislation requires states to set certain rules and to more aggressively monitor compliance. It also makes certain practices a violation of federal law.

The budget resolution asks the National Assn. of Insurance Commissioners to identify the 10 standard packages of benefits. If the association does not act within nine months, the Department of Health and Human Services would set the standard packages. All insurers would have to offer a standard minimum benefit policy, according to the legislation. If other benefits are offered, they must be drawn from an NAIC standard list and the potential policyholder must be provided with price comparisons of the minimum benefit policy and the policy with extra benefits.

The Blue Cross and Blue Shield insurance organizations expressed some concerns about the notion of standard benefits, said Mike Odom, a spokesman for Blue Shield of California. “At Blue Shield, we have some progressive policies that go beyond Medicare,” he said, citing a policy that provides a wellness program for seniors. There is some concern that standard benefits “might unnecessarily suppress the healthy marketing of new plans” that elderly people might want, Odom said.

The Blue Cross and Blue Shield organizations in different states and the American Assn. of Retired People together sell more than half of all Medigap policies sold, but Consumer Reports magazine concluded after a study last year that many of the best policies are sold by less well-known companies.

In general, the insurance industry supported the recent federal legislation, said Alan Richards, assistant Washington counsel for the Health Insurance Assn. of America. The repeal last year of the Catastrophic Coverage Act was one reason the association thought Congress should take some action this year, he said. The catastrophic act eliminated some of the need for Medigap insurance because it expanded Medicare. But the act was killed by a group of vocal elderly people who complained that it cost too much money.

HIAA also decided to support a reform act because measures proposed by Rep. Ron Wyden (D-Ore.) and Sen. Thomas A. Daschle (D-S.D.) clearly had momentum, Richards said. “We felt we would have been swamped by the tide if we opposed it,” he said.

HIAA felt that there was “a better way” to simplify policies than setting a fixed number of offerings, but it did not oppose the idea, he said.

The association also supported provisions, adopted by lawmakers, that guarantee the right to renew policies and provisions making it a violation of federal law to sell a policy in a state where that specific policy has not been approved by state regulators, Richards said. Currently, some policies are allowed to be sold in some states if the policy has been approved by a certain number of other states.

Also in the legislation are provisions banning the sale of additional policies to persons who already own a Medigap policy. An insurer violating the rule could be imprisoned or fined $25,000. Consumer groups and congressional and state investigators have documented cases in the past of elderly people holding several duplicate policies for which they were paying thousands of dollars a year in premiums.

The industry association did not support a requirement in the bill that insurers pay Medigap benefits equal to at last 65 cents of every dollar they receive in premiums from the holders of the policies. The federal minimum loss ratio is currently 60%, but some states have higher ratios.

The theory behind the provision, Richard said, is that higher minimum loss ratios would discourage insurers from paying high commissions to agents. High commissions, particularly for the first year of policies, are behind a lot of the high-pressure sales tactics in the industry, activists said.

Blue Cross of California has policies with 80% to 90% ratios, said D. Mark Weinberg, executive vice president for consumer services. California has been much more aggressive in policing the sale of Medigap policies and recent actions taken by the state are more relevant to the industry here than the federal measures, he said. “Our process has been viewed as a model of standardization,” he said.

California has rules on marketing conduct, requires stringent reporting by insurers and requires pre-approval of advertising and marketing literature, he said. The state also regulates commissions, requiring that first-year commissions can’t be more than twice what they would be for later years of a policy.