Loss Ratios on Medigap Insurance

T-HRD-87-3: Published: Mar 10, 1987. Publicly Released: Mar 10, 1987.

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GAO testified on the federal standards designed to protect the elderly from substandard and overpriced Medigap policies and the percentage of premiums returned to policyholders as benefits. GAO found that: (1) in 1980, Congress established minimum standards for loss ratios, set requirements for minimum coverage of benefits, and provided criminal penalties for abusive sales practices to encourage state regulation of Medigap policies; (2) the total estimated Medigap market in 1984 was approximately $5 billion; (3) an amendment encouraged state adoption of Medigap insurance regulatory programs at least as stringent as the federal standards, resulting in more uniform regulation of Medigap insurance and increased protection for the elderly against substandard and overpriced policies; (4) many states are trying to prevent abuses by monitoring sales and advertising practices, revoking or suspending insurance agent licenses, and issuing cease-and-desist orders to insurers; (5) although the actual loss ratios of most policies surveyed were below the legislation targets, the two most commonly purchased policies had higher-than-target loss ratios; and (6) the weighted average loss ratio for commercial insurers was approximately 60 percent in 1984 and 65.8 percent in 1985. GAO also found that: (1) Medigap policies are not catastrophic insurance for acute or long-term care and do not place a limit on policyholder out-of-pocket expenses; (2) insurers could change Medigap policies to become catastrophic acute care insurance and could increase their premiums to cover the anticipated increase in benefit payouts or absorb all or part of the increase, thereby increasing their loss ratios; (3) administrative costs for a Medicare-administered catastrophic program should be minimal and benefit payouts should represent virtually all of the program's costs; and (4) if a catastrophic acute-care insurance program for Medicare beneficiaries is established, there will probably continue to be a demand for Medigap-type policies.

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