Health section: Bundling Medicare Supplement and short-term care
Explore how bundling Medicare Supplement (Medigap) and short-term care products may provide a complementary hedge of certain policyholder behavior risks.
The beneficiary population for Medicare continues to evolve and its appetite for choice and consumerism is on the rise. Insurers that wish to capitalize on this demand can offer new selections on their menu of Medicare products. The Medicare Medical Savings Account is an example of a consumerism option for which the market may now be ready. Introduced in 2007, it has gained traction in recent years and is well suited for beneficiaries who have been accustomed to commercial consumer-driven health plans, especially healthier beneficiaries who seek to maintain insurance and financial flexibility in their retirement years.
In recent years, the prevalence of consumer-driven health plans (CDHPs) in the working age population has increased dramatically, partially as a mechanism to control healthcare costs and also to encourage beneficiaries to be more engaged and aware of their healthcare expenses. In the America's Health Insurance Plans (AHIP) 2015 Census, enrollment in consumer-driven health plans experienced the largest year-over-year increase, totaling 19.7 million enrollees.1
Medicare Medical Savings Account (Medicare MSA) plans are analogous to consumer-driven health plans in the commercial market, such as health savings accounts (HSAs). A Medicare MSA combines a high-deductible health plan (HDHP) with an MSA to fund healthcare expenses. Generally speaking, the MSA will be used to fund the deductible and the high-deductible health plan will be used to fund post-deductible healthcare expenses (more details are provided in the sections below.)
Introduced by three insurers to the market in 2007, MSAs are still relatively new, and enrollment in Medicare MSAs is extremely low compared with other Medicare Advantage plan types and Original Medicare. The low enrollment may be attributed to a lack of product knowledge and understanding about how it works, both among eligible beneficiaries and carriers. A possible driver of this is that consumer-driven health plans were not prevalent as employer-sponsored insurance options when the majority of current Medicare beneficiaries were working, coupled with Medicare Supplement purchasers exhibiting strong preferences toward plans with the lowest beneficiary cost sharing.
Despite low penetration thus far, Medicare MSAs are positioned to gain traction in the future. Data from the Centers for Medicare and Medicaid Services (CMS) showed enrollment increasing to 11,774 in 2014, up from 594 in 2010. As the working-age population becomes more accustomed to consumer-driven health plans, they may naturally carry over this mindset once they qualify for Medicare. The Medicare MSA could be a product perfectly suited for these beneficiaries, who age into Medicare, and insurers offering these products could possess a clear strategic advantage in capturing these new beneficiaries and increasing their market share in addition to differentiating themselves from competitors. Additionally, a high-level modeling exercise shows that Medicare MSAs may prove to be a financially superior option for a newly retired and relatively healthy Medicare beneficiary.
The MSA account can be used by the beneficiary to pay qualified medical expenses, as defined by the Internal Revenue Service (IRS), including costs for medical services not covered by Medicare. An important feature of MSAs is that only Medicare-covered Part A/B expenses count toward the plan deductible. Once the beneficiary’s Medicare-covered Part A/B expenses exceed the deductible, the plan will cover 100% of them, subject to Medicare coverage limits (e.g., inpatient days beyond lifetime reserve days). Effectively, the deductible serves as the out-of-pocket maximum for Medicare-covered Part A/B expenses.
If the MSA funds are entirely used prior to reaching the deductible, the beneficiary is responsible for paying out of pocket for medical expenses until the deductible is reached. In the event that MSA funds are used to pay for nonqualified medical expenses, the funds will be taxed as income and also subject to a 50% tax penalty.
MSA funds that are not used during the year roll over to the following year, similar to the procedure with an HSA.
CMS makes a “lump sum” payment annually at the beginning of the year to insurers, who then must deposit this amount into the beneficiary’s MSA. This amount is prorated for beneficiaries who are not enrolled for the entire year. Insurers also receive a monthly prospective capitation payment (similar to Medicare Advantage), less one-twelfth of the “lump sum” payment. Calculation details are briefly outlined below:
Beneficiaries can access funds through a debit card and may also move their funds to an alternative bank or financial institution of their choosing. Like traditional HSAs, the funds can be invested (gains accumulate tax-free), and unused funds roll over to the next year. Unlike traditional HSAs, neither beneficiaries nor employers can contribute any money to the MSA. All contributions are made through the Medicare program.
The following points outline some key information regarding MSA benefits and access:
One major difference from traditional Medical Advantage is that Medicare MSAs do not allow first-dollar coverage of preventive services, such as annual physicals.
Consider Joe, Anne, and Steve, all 66-year-olds who have been eligible for Medicare for about a year. Joe is very healthy, with a 0.30 hierarchical condition categories (HCC) risk score, and expects to see his primary care physician and specialist approximately once a year for checkups or miscellaneous health concerns. He receives a minimal amount of diagnostic lab procedures and/or x-rays. Anne’s health is average for her age group (0.60 HCC risk score) and she utilizes Medicare-covered medical services about twice as much as Joe. Steve’s health is below average (1.10 HCC risk score) and he utilizes Medicare-covered medical services significantly more than either Anne or Joe; in addition, Steve has an inpatient hospital stay in years one, three, and five following enrollment in a Medicare MSA.
All three join a Medicare MSA plan that has an average overall risk score of 0.85, annual “lump sum” deposit of $1,728, and a deductible of $3,000. All three make low-risk investment choices and expect their MSA accounts to earn a 2.0% annual return. Investment returns are calculated using simple interest for the net account balance carrying over to the beginning of the next year to simplify results. In the first year, their claim expenses are outlined in Figure 1.
Figure 1: Claim Expenses and Revenue
|MSA Account: Initial Balance||$1,728||$1,728||$1,728|
|Primary Care Physician||200||400||800||Annual checkup, illness visits|
|Specialist Care Physician||100||400||1,000||Specialist procedures and services|
|Inpatient Hospital Stay||0||0||8,000|
|Outpatient Labs/X-rays/Surgery||350||500||2,000||Diagnostic procedures, surgery|
|Dental Benefit Premiums and Cost Sharing2||200||200||200||Routine and preventive; see footnote below|
|Medical Expenses Funded by MSA Account||850||1,500||1,728||Equal to medical expenses for Joe and Anne; Steve’s medical expenses fully exhaust the MSA account balance|
|Medical Expenses Paid by Beneficiary Out of Pocket||0||0||1,472||Joe and Anne pay $0 out of pocket because their MSA accounts funded all of their medical expenses; Steve pays the remaining $1,472 left out of pocket to meet his $3,000 deductible|
|Medicare-Covered Medical Expenses Paid by Plan||0||0||8,800||The plan pays $0 because the MSA funded all of Joe and Anne’s medical expenses; the plan pays Steve’s Medicare-covered medical expenses after the $3,000 deductible|
|Plan Revenue From CMS||1,085||3,898||8,585||Equal to the annualized calculation of the plan’s standardized benchmark times the individual’s risk score, less the MSA deposit|
|Plan CMS Revenue Less Medical Expenses||1,085||3,898||-215||Equal to the plan revenue less Medicare-covered medical expenses paid by the plan|
|MSA Account End-of-Year Balance||896||233||0||Equal to the initial MSA account balance, less medical expenses, plus investment income|
2 Dental benefits are not covered under Original Medicare. We assume that all purchased an optional supplemental benefit package, which included dental benefits. While funds from the MSA account can be used to pay for the premiums associated with these benefits, the claim expenses do not count toward the deductible.
3 While not considered in these examples, Medicare MSA enrollees must obtain Part D coverage on their own, which averages $41 per month for all 2016 prescription drug plan (PDP) types combined, based on published CMS landscape files, plus cost-sharing.
At the end of the year, Joe’s account balance is $896, Anne’s is $233, and Steve’s is $0. Joe and Anne have paid $0 out of pocket for medical expenses.
A key financial question from the perspective of both individual beneficiaries and the health plan arises—how does a Medicare MSA plan compare with a Medicare Advantage (MA) plan? The potential differences in expenditures and financial position in a Medicare MSA plan versus an MA plan (over a period of six years) are shown in Figure 2 and represent an extension of the above one-year scenario. Note that this analysis has taken into consideration that all three members will experience increased healthcare claims over time, consistent with increased age-related morbidity. Similarly, certain plan provisions are assumed to trend over time. The comparable MA plan is assumed to have a $0 deductible (other beneficiary cost sharing applies), $0 premium, and a three-star rating.
Figure 2: Medicare MSA Plan vs. MA Plan
|Medicare MSA Plan (6 years)||Joe||Anne||Steve|
|Total Medical Expenses||$5,782||$10,203||$81,623|
|Expenses Covered by MSA Account||5,782||10,203||10,901|
|Beneficiary Out-of-Pocket Expenses||0||0||9,384|
|MSA Account Value (end of 6 years)||5,493||765||0|
|Health Plan Revenue (bid)||6,843||24,586||54,158|
|Health Plan Medical Expenses||0||0||61,338|
|Health Plan Revenue Less Medical Expenses||6,843||24,586||-7,180|
Comparable MA Plan (6 years)
|Beneficiary Out-of-Pocket Expenses||791||1,445||7,064|
|Health Plan Revenue (bid + rebate)||16,741||33,483||61,385|
|Health Plan Medical Expenses||4,991||8,758||74,559|
|Health Plan Revenue Less Medical Expenses||11,750||24,725||-13,174|
In terms of pricing and administrative considerations, Medicare MSAs are simpler to design and administer than traditional Medicare Advantage plans. While Medicare Advantage plans need to price beneficiary premiums, design cost-sharing levels for numerous services, and comply with various requirements like the out-of-pocket maximum, minimum loss ratio, and total beneficiary cost across years, the only significant pricing/benefit decisions for a Medicare MSA are setting the deductible and pricing optional supplemental benefits.
While attractive to a subset of the Medicare-eligible population, Medicare MSA plans are not appropriate for all beneficiaries; specifically, beneficiaries expecting to incur higher medical expenses (like Steve) could find that a traditional Medicare Advantage plan makes more financial sense. When setting the out-of-pocket maximum, insurers should remain aware of the possibility of anti-selection by the sickest Medicare beneficiaries. However, for healthy beneficiaries (like Joe), Medicare MSA plans may be a desirable alternative, and health plans should consider incorporating MSAs in their Medicare product suites to capture those beneficiaries.
Medicare Medical Savings Accounts: An alternative to traditional Medicare Advantage
The Medicare Medical Savings Account has gained traction in recent years and is well suited for beneficiaries who have been accustomed to commercial consumer-driven health plans.