First Dollar Coverage

I had the opportunity to meet with the CEO of a large health insurance company last week, and he raised an important point during our discussions: he is actually anticipating higher out-of-pocket medical costs than HealthView.
Many who are familiar with HealthView know that for the past several years, I have warned about the dangers of future health care expenses. Some have questioned the totals – especially pre-retirees who currently enjoy employer group Medical coverage for a fairly modest price. So now, you may be wondering: how is it possible that future health care costs might be even higher than we thought?
The answer comes in expected legislative changes related to a something referred to as first dollar coverage.

Next question: What is first dollar coverage?

Since Medicare only pays around 50% to 55% of medical expenses, retirees can purchase supplemental (or gap) insurance that begins where Medicare leaves off. There are several options, but the majority of retirees who purchase a supplemental policy choose between two plans – C and F – that take over coverage with the very first dollar of expense that is no longer covered by Medicare. These policies have the least amount of cost sharing (which refers to out-of-pocket expenses, including deductibles and copays.)

So what’s the problem with that?

Current research reveals that retirees with first dollar coverage utilize the health care system more than retirees without first dollar coverage. This development has led many policymakers to believe that first dollar coverage motivates retirees to over-utilize the medical system, which places unnecessary strain on Medicare.

To put the theory in basic terms: retirees with first dollar coverage end up costing Medicare more money.

This may or may not be true long-term. An alternative perspective might be that retirees who do not have first dollar coverage, and have to pay out-of-pocket for health-related services, actually delay or avoid medical treatments. In the long run, this approach might not be a fiscally prudent option because as people age and their health conditions worsen, larger and more complex treatments could be needed, which can drive overall costs higher.
Regardless, the Medicare system is overburdened and policymakers are looking for ways to cut costs. Translation? It is probably safe to bet on an increase in future cost-sharing expenses.

What types of changes are under consideration?

One option under review is to include a deductible on all supplemental plans, which will effectively eliminate first dollar coverage. Another proposal is to combine the following two changes: eliminate first dollar coverage and also add restrictions to supplemental insurance coverage. A third option could potentially reduce Medicare’s financial exposure by levying a surcharge on retirees (in addition to their premiums) who choose plans with first dollar coverage.
Completely independent of potential changes in supplemental plans, raising deductibles on Medicare Part A (hospitalization) and Medicare Part B (doctor visits) is also a possibility.

Are retirees who currently own supplemental policies going to be exempt from new cost-saving measures?

Given the complexity of the Medicare system, having multiple cohorts of subscribers will only add to the confusion and reduce the level of Medicare’s savings. Therefore, existing supplemental policyholders should not count on being exempt from future policy changes.

How important are these types of policy changes to the Medicare system?

Implementing some combination of the options mentioned above could save Medicare tens of billions of dollars.
What’s the bottom line?

As outlined in HealthView’s “2015 Health Care Cost Data Report,” pre-retirees covered by employer plans have seen a 50% increase in deductibles since 2009. In keeping with that trend, it is highly unlikely that current or future retirees will be able to sidestep this shift in responsibility. Whether in the workforce or retired, Americans will become more accountable for health care expenditures.
Want proof? Here’s an example.

Congress recently passed a bill called the “Doc Fix,” which was supported by both Democrats and Republicans. The law’s original purpose was to avoid hitting doctors with a 21% Medicare pay cut. Another feature included a new “Merit Based Incentive Payment System.” These two headline-makers overshadowed a clause of the bill that received very little press, but nonetheless could have long-term implications for affluent Medicare beneficiaries. Beginning in 2018, the top means testing brackets have been adjusted downwards, which will result in greater surcharges for more affluent retirees.

As millions of retiring Americans continue to further stress the Medicare system, policymakers are expected to shift health care costs to retirees in an effort to keep the Medicare program viable. Therefore, it is critical for each of us to be prepared for a continued escalation of future health-related expenses.