THE BASICS OF MEDIGAP INSURANCE

By John J. Campbell, Esq., CELA, MSCC

 

Introduction

 

          In any worker’s compensation (WC) settlement of future medical expenses, the claimant is required to reasonably consider Medicare’s interests as secondary payer if: 1) the claimant is already eligible for Medicare; or 2) the claimant is reasonably expected to become eligible within 30 months of the settlement and the total value of the settlement exceeds $250,000.  The claimant must submit a Medicare Set Aside Arrangement (MSA) for future medical expenses to the Centers for Medicare and Medicaid Services (CMS) for approval to preserve Medicare coverage for future work related medical expenses after the MSA is exhausted.

 

          Plainly, it is anticipated that the primary source for payment of the claimant’s medical expenses in the future, after the funds in the MSA are exhausted, will be Medicare.  In the mean time, the claimant may also depend on Medicare to cover services that are not related to the claimant’s injuries. 

 

          Medicare, often referred to as America’s national health insurance plan for the elderly and disabled, was originally modeled after traditional medical insurance plans.  Benefits are limited to certain services and are subject to deductibles and coinsurance payments.  For disabled Medicare beneficiaries in the traditional Medicare program, these deductible and coinsurance amounts can be significant.

 

          Work related medical expenses of the type normally covered by Medicare will be paid in full from the allocation amount in the MSA, as long as the allocation amount lasts.  However, when the funds in the MSA are exhausted, the claimant will be required to pay for Medicare deductible and coinsurance amounts out of his or her own funds.

 

          Proper settlement planning requires knowledge of available means to assist the claimant with these additional expenses.  Where the claimant has access to group health plan coverage, that insurance will usually pick up most expenses that Medicare does not cover.  However, if group health coverage is not available, or if it will only be available for a limited time (e.g., during a COBRA extension of coverage period), the claimant is well advised to investigate Medicare supplemental (or “Medigap”) insurance to fill in the “gaps” in Medicare coverage.

 

Medigap Insurance Until January 1, 2006

 

          Medigap policies have been subject to standardization requirements under federal and state laws for many years.  Medigap policies sold in all but 3 “waiver states”[1] must currently conform to one of 10 standardized policies, referred to by the letters “A” through “J”.  Each policy offers different combinations of supplemental coverage that can range from the fairly basic (A) to the fairly comprehensive (J).  As a result, the Medigap policies sold in most states are exactly the same, regardless of which insurance company may offer these policies.

 

          All Medigap policies sold through December 31, 2005 must at least offer the following basic benefits: 1) Medicare Part A coinsurance plus coverage for 365 additional days during the beneficiary’s lifetime after Medicare benefits end; 2) Medicare Part B coinsurance, which is generally 20% of Medicare approved expenses; and 3) full coverage for the first 3 pints of blood each year.  The Medigap A policy includes only these basic benefits.  Medigap policies B-J offer increased benefits in different packages, as illustrated below:

 

MEDIGAP BENEFITS BY TYPE OF PLAN	A	B	C	D	E	F*	G	H	I	J*
Basic Benefits	X	X	X	X	X	X	X	X	X	X
Part A: Inpatient Hospital Deductible		X	X	X	X	X	X	X	X	X
Part A: Skilled-Nursing Facility Co-Insurance			X	X	X	X	X	X	X	X
Part B: Deductible			X			X
Foreign Travel Emergency			X	X	X	X	X	X	X	X
At-Home Recovery				X			X		X	X
Part B: Excess Charges						100%	80%		100%	100%
Preventive Care					X					X
Prescription Drugs								Basic	Basic	Extended

*Medigap F and J policies are also available with a high deductible option.

 

          The prescription drug benefits available under Medigap policies H-I are for basic coverage only.  After the beneficiary pays an annual deductible of $250, the Medigap plan pays 50% up to a maximum of $1,250 per year.  The extended prescription drug coverage under the Medigap J policy pays 50% up to a maximum of $3,000 per year, after the annual deductible of $250.

 

Medigap Insurance After January 1, 2006

 

          The Medicare Prescription Drug, Modernization and Improvement Act of 2003 (MMA) contains provisions that will affect Medigap insurance.  These provisions  will change coverage under Medigap H, I and J policies; and will create two new Medigap policies (designated K and L policies) with minimum benefits that differ from Medigap A-J policies.  The provisions of the MMA also provide for an initial enrollment period (IEP) and open enrollment periods for Medigap coverage; and when a Medicare beneficiary may be guaranteed the right to obtain Medigap insurance, regardless of health or pre-existing conditions. 

 

          The MMA requires the adoption of new uniform standards for all Medigap policies.  On March 25, 2005, the Centers for Medicare and Medicaid Services officially approved the new Medigap standards drafted by the National Association of Insurance Commissioners as being the official model regulation under the MMA.  All non-waiver states must adopt this regulation by no later than September 8, 2005.  The model regulation was published in 70 FR 15393, March 25, 2005, and can be viewed online through the Government Printing Office website:  http://www.gpoaccess.gov/fr/index.html

         

          Under the new model regulation, basic core coverage under Medigap policies A-J will be the same as under the former regulation.  In particular, all Medigap A-J polices issued after December 31, 1005 will be required to provide the following minimum basic core benefits: 1) Medicare Part A coinsurance amounts for days 61-90 of inpatient hospital stays in any spell of illness; 2) Medicare Part A coinsurance amounts for all of the beneficiary’s 60 lifetime hospital inpatient reserve days; 3) Coverage of 100% of Medicare covered costs for an additional 365 lifetime inpatient hospital days after Medicare Part A benefits are exhausted; 4) Coverage of Medicare Part B coinsurance amounts (after the $110 Medicare Part B deductible); and 5) The reasonable cost of the first 3 pints of blood. 

 

          Medigap policies B-J will continue to offer increased benefits in different packages, as illustrated in the chart above.  However, beginning January 1, 2006, new Medigap policies containing prescription drug coverage (Medigap H, I or J policies) may no longer be sold.  Medicare beneficiaries who already have a Medigap H, I or J policy as of January 1, 2006, but who do not sign up for a Medicare Part D prescription drug plan, will have the option of renewing their Medigap H, I or J policies with prescription drug coverage. 

 

          Those Medicare beneficiaries who sign up for a Medicare Part D prescription drug plan during the Initial Enrollment Period (IEP) from November 15, 2005 through May 15, 2006 will be able to keep and renew their Medigap H, I or J policies, but without prescription drug coverage.  Premiums for these plans must be adjusted to reflect this loss of prescription drug benefits.  Alternatively, these Medicare beneficiaries may opt to drop their Medigap H, I or J policies during the IEP, with a guaranteed ability to purchase a Medigap A, B, C or F policy (or one of the new K or L policies) as a replacement.  The guaranteed issue period for replacement policies ends 63 days after enrollment in Medicare Part D.

 

          Medigap policies under the new regulation do not provide coverage to fill the gaps not covered under a Medicare Part C Advantage Plan or under a Medicare Part D prescription drug plan.  The inability of any new Medigap policy to provide supplemental coverage for Medicare Part D prescription drug benefits will be especially instrumental to any beneficiary’s decision whether to enroll in Medicare Part D.

  

          The basic Medicare Part D prescription plan will provide only limited prescription drug coverage.  The beneficiary must pay 100% of the Part D deductible amount of $250 before coverage begins.  For annual prescription costs from $251 through $2,250, Medicare will pay 75%.  For prescription costs after the beneficiary reaches the annual out of pocket amount ($3,600 per year in 2006, and subject to increase annually thereafter), Medicare will pay up to 95%.   

 

          All beneficiary payments will all count toward the annual out of pocket amount.  The annual out of pocket amount will not be reached until the beneficiary's total annual prescription drug costs equal $5,100 (in 2006).  There is no Medicare Part D coverage for annual prescription costs from $2,251 up to $5,100.  This huge gap in coverage, often referred to as the “donut hole,” can represent a serious problem for Medicare beneficiaries with chronic illnesses.

 

          Chronically ill or disabled beneficiaries will often find that their total prescription costs will average  more than $187.50 per month ($2,250 per year) for necessary medications, but will not be great enough to fall within Medicare Part D catastrophic prescription drug coverage.  In these cases, beneficiaries will find themselves in the donut hole at some point before the end of the year.  Without Medigap prescription drug benefits, these beneficiaries will be required to pay for many of their medication expenses on their own.

 

          Any Medicare beneficiaries falling into this group, and who currently own Medigap H, I or J policies, may want to preserve their coverage under those policies as an alternative to enrolling in Medicare Part D.  Those without Medigap insurance or those with Medigap A- I policies may wish to purchase or upgrade to a Medigap J policy if possible before December 31, 2005.  However, since the prescription drug benefits under Medigap H, I & J policies are less valuable than Medicare Part D basic coverage, these policies will not be considered “creditable coverage” under the MMA.  Therefore, by delaying Part D enrollment in favor of maintaining prescription drug coverage under an existing Medigap H, I or J policy will result in late enrollment penalties if the beneficiary later decides to enroll in Medicare Part D; and preexisting condition exclusions may be applied.

 

          The new Medigap K and L policies, which will be available as of January 1, 2006, must also provide minimum, standardized benefit packages.  Some of the basic core benefits will differ from those under Medigap A-J policies, including a limitation on coverage for the first 3 pints of blood.  Further, many of the extended benefits under each of these policies will be limited until annual out-of-pocket amounts are met. 

 

          Medigap K policies must provide the following minimum basic benefits:

 

1) Medicare Part A coinsurance amounts for days 61-90 of inpatient hospital stays in any spell of illness;

 

2) Medicare Part A coinsurance amounts for the beneficiary’s 60 lifetime hospital inpatient reserve days;

 

3) Coverage for an additional 365 lifetime inpatient hospital days after Medicare Part A benefits, including all lifetime reserve days, are exhausted;

 

4) Coverage of 50% of the Medicare Part A deductible amount until the annual out-of-pocket amount is met;

 

5) Coverage of 50% of the Skilled Nursing Facility coinsurance for days 21-100 until the annual out-of-pocket amount is met;

 

6) Coverage of 50% of Medicare Part A coinsurance for hospice and respite care until the annual out of pocket amount is met;

 

7) Coverage for 50% of the reasonable cost of the first 3 pints of blood until the annual out-of-pocket amount is met;

 

8) Coverage for 100% of Medicare Part B coinsurance for preventive services (after payment of the $110 Medicare Part B deductible);

 

9) Coverage for 50% of the Medicare Part B coinsurance for other Part B covered services until the annual out-of-pocket amount is met; and

 

10) Coverage for 100% of all Medicare Part A and Part B coinsurance amounts for the rest of the calendar year after the annual out-of-pocket amount is met.  The annual out-of-pocket amount under Plan K is $4,000 for all Medicare Part A and Part B expenditures.

 

          Medigap L policies must provide the following minimum basic benefits:

 

1) Medicare Part A coinsurance amounts for days 61-90 of inpatient hospital stays in any spell of illness;

 

2) Medicare Part A coinsurance amounts for the beneficiary’s 60 lifetime hospital inpatient reserve days;

 

3) Coverage for an additional 365 lifetime inpatient hospital days after Medicare Part A benefits, including all lifetime reserve days, are exhausted;

 

4) Coverage of 75% of the Medicare Part A deductible amount until the annual out-of-pocket amount is met;

 

5) Coverage of 75% of the Skilled Nursing Facility coinsurance for days 21-100 until the annual out-of-pocket amount is met;

 

6) Coverage of 75% of Medicare Part A coinsurance for hospice and respite care until the annual out of pocket amount is met;

 

7) Coverage for 75% of the reasonable cost of the first 3 pints of blood until the annual out-of-pocket amount is met;

 

8) Coverage for 100% of Medicare Part B coinsurance for preventive services (after payment of the $110 Medicare Part B deductible);

 

9) Coverage for 75% of the Medicare Part B coinsurance for other Part B covered services until the annual out-of-pocket amount is met; and

 

10) Coverage for 100% of all Medicare Part A and Part B coinsurance amounts for the rest of the calendar year after the annual out-of-pocket amount is met.  The annual out-of-pocket amount under Plan L is $2,000 for all Medicare Part A and Part B expenditures.

 

          New Medicare beneficiaries will continue to be able to purchase a guaranteed issue Medigap policy within the open enrollment period, which extends for 6 months after the first day of the month in which the beneficiary is age 65 and is enrolled in Medicare Part B.  States may also apply the open enrollment period to persons who delay enrollment in Medicare Part B past age 65; or who may become enrolled in Medicare Part B before age 65. 

 

          In other words, federal law permits anyone who enrolls in Medicare Part B to purchase a Medigap policy.  However, federal law does not require that fee-for-service Medigap policies be offered to beneficiaries under age 65 who are eligible for Medicare Part B due to disability or end stage renal disease; or beneficiaries who do not enroll in Medicare Part B until after age 65.  The ability of disabled Medicare beneficiaries under age 65 to purchase a Medigap policy will depend on the state in which the beneficiary lives.  (Colorado, for example, provides for open enrollment periods for persons enrolled in Medicare Part B who are age 65 or older, and who are under age 65.)

 

          During the open enrollment period, the beneficiary is entitled to purchase a Medigap A, B, C, F, K or L policy, regardless of health or preexisting conditions.  Medigap D, E & G policies may also be included in certain states.  Once purchased, a Medigap policy can only be canceled for non-payment of premiums or for fraud.

 

          For Medigap purposes, a “preexisting condition” is one which is first diagnosed or for which the beneficiary has received treatment within 6 months before applying for a Medigap policy.  Medigap policies may not impose preexisting condition exclusions upon beneficiaries who have maintained at least 6 months of creditable coverage without a gap in coverage of more than 63 days.  If a beneficiary has not maintained creditable coverage for the full 6 month period prior to applying for a Medigap policy, preexisting condition exclusions may not be imposed for a period of time longer than the period during which the beneficiary was without creditable coverage for more than 63 days.

 

          Creditable coverage includes coverage under a group health plan, private health insurance, Medicare, Medicaid, health plans for federal and state employees and certain other types of coverage enumerated under the regulation.  Liability insurance, WC, no-fault insurance and disability insurance are notably among the types of policies or plans that are not creditable coverage.  

 

          The different Medigap policies generally become more expensive as the coverage package becomes more comprehensive.  Also, while the policies are standardized by law in most states, the amount the issuing company can charge for premiums is not.  In other words, a Medigap L policy through one insurer may be more expensive than the same policy through another insurer.  Once the particular type of policy (A-L) is decided upon, the claimant will need to compare price, service and the rating of the issuing insurance company to choose the best one.

 

          Finally, CMS does not permit the premiums for a Medigap policy to be paid from an MSA.  Therefore, the WC settlement should be sufficient to provide funds outside of any required MSA allocation for this purpose. 

 

Conclusion

 

          The preservation of future Medicare eligibility is an important aspect of a WC settlement involving a disabled or elderly claimant.  An MSA, funded with an allocation amount approved by CMS, will pay for all of the claimant’s work related future medical expenses of the type normally covered by Medicare for so long as the funds in the MSA last. 

 

          However, Medicare covered services for conditions which are not work related cannot be paid by the MSA and will need to be submitted to Medicare for payment.  Further, once the MSA is exhausted, the claimant will need to look to Medicare as the primary source of payment for all Medicare covered services.

 

          As a result, planning for payment of medical expenses that will not be paid by Medicare, including Medicare deductibles and coinsurance, is just as important as planning to preserve eligibility for Medicare.  Where the claimant’s ability to rely on group health coverage is limited, a Medigap policy may be the best available alternative to paying privately for many of these “extras.”

 

          Practitioners should become familiar with federal and state laws applicable to Medigap insurance, especially the new laws and regulations that will take effect on January 1, 2006.  This will be crucial to advising the claimant properly of his or her rights and options regarding Medigap insurance; and will reduce the likelihood that the claimant will lose the ability to purchase a Medigap policy by applying too late.

 

End Notes