Competition between Medigap and Medicare Advantage

Because access to employer-sponsored retiree coverage is typically determined before people retire, most of the short-run competition in the retiree market is between Medigap plans and Medicare Advantage. McLaughlin, Chernew, and Taylor [2002] used the 1996 to 1997 Community Tracking Survey to examine the interaction of Medigap and Medicare managed care at 56 sites in 30 states.

They found substantial variation in premiums across markets, insurers, and coverages. As importantly, there was a strong positive correlation between Medigap premiums and Medicare HMO enrollment. A one standard deviation increase in the average Medigap premium [from $236 per year to $291] was associated with an increase in Medicare HMO participation of 8%age points.

The advent of new forms of Medicare managed care options, together with Medicare prescription drug benefits, suggests that these estimates of substitution may no longer be reliable. However, older citizens have increasing experience with managed care plans through their working lives and may be more willing to consider such options on retirement. Morrisey and Jensen [2001] used the Health and Retirement Survey to explore the type of coverage that active workers, ages 57 to 63 in 1996, selected on transitioning to retiree coverage in 1998.

They found that 87% of those with activeworker HMO coverage [and who had a choice of plan types when they retired] took HMO coverage, 73.8% of those with PPO coverage chose PPO coverage on retirement, and 47.5% of those with traditional coverage chose to continue with traditional coverage. These transitions suggest that future retirees with even greater experience with managed care plans may be amenable to Medicare Advantage type plans, just as those with employer-sponsored retiree coverage are disproportionately likely to remain in managed care plans.

Fewer than 10% of Medicare beneficiaries lack some supplemental form of health insurance coverage.
The largest employers commonly offer employer-sponsored retiree coverage, which typically provides coverage analogous to that provided to active workers. Coordination of coverage with Medicare makes retiree coverage less expensive than that held by active workers.
Medigap coverage is typically purchased individually and covers the outof- pocket expenses associated with covered Medicare services.
Supplemental coverage increases traditional Medicare's claims experience due to moral hazard. Effectively lower out-of-pocket prices increase Medicare expenses by 15 to 32%.
Medicare Advantage is Medicare managed care coverage offered by private insurers. Insurers bid to provide coverage relative to a CMSestablished benchmark. Most bids are below the benchmark, and as a result, most plans offer lower cost sharing and/or enhanced benefits relative to traditional Medicare. Plans received risk-adjusted payments for the beneficiaries they actually enroll.
The implementation of the Medicare prescription drug program is having significant effects on the supplemental retiree health insurance market.
Medigap and Medicare Advantage are effectively substitutes for each other.

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Competition between Medigap and Medicare Advantage

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