Overall Medigap Market

In the 1988-95 period, the Medigap insurance market grew from about $7 billion to over $12 billion (see fig. For the 8-year period, the average loss ratio was 81 percent with a low of 76 percent in 1993 and a high of 86 percent in 1995. 2). Moreover, loss ratios varied among insurers within a state. 3). In 1995, the number of policies not meeting the standards was 141 or 4 percent of the total, and the premiums were $203 million. However, we identified only two policies that made refunds in 1995. To determine why policies with loss ratios below the applicable standard in 1994 or 1995 did not have to make refunds, we selected a random sample of these policies with earned premiums under $1 million and asked the states, the District of Columbia, and Puerto Rico to send us copies of the refund calculation forms for the sample and for all policies with premiums over $1 million. Most of the policies with earned premiums of $1 million or more did not have to pay refunds because, although their loss ratios in 1994 or 1995 were below standards, their cumulative loss ratio since inception was greater than the benchmark ratio for the year in question. Medigap policies representing most of the premium dollars had loss ratios in 1994 and 1995 that were higher than federal law requires. Most policies with loss ratios below standards in 1994 and 1995 were not considered credible and, thus, were not subject to the refund provision. The primary reason for requiring refunds and credits is to give insurers incentives to meet loss ratio standards and thereby avoid possibly unfavorable public relations consequences. The relatively low amount of premiums for policies with loss ratios below the standards indicates that the incentive is working.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO reviewed insurers' compliance with Medigap loss ratios and standards, focusing on: (1) the overall Medigap market; (2) which Medigap policies had loss ratios below the standards in 1994 and 1995; and (3) which policies resulted in refunds or credits, or, if not, why.

What GAO Found

GAO noted that: (1) from 1988 through 1995, the Medigap insurance market grew from $7 billion to over $12 billion with most of the growth occurring before 1993; (2) during this 8-year period, loss ratios averaged 81 percent in 1995; (3) in 1994 and 1995, over 90 percent of the policies in force for 3 years or more, representing most of the premium dollars, met loss ratio standards; (4) premiums for policies with loss ratios below standards totalled $448 million in 1994 and $203 million in 1995; (5) loss ratios varied substantially among states, among different benefit packages, and among insurers; (6) although thousands of individual policy forms had loss ratios below standards, no refunds were required in 1994 and only two were required in 1995; (7) the refund provision did not apply because most of these policies' loss experience was based on too few policyholders to be considered credible under the National Association of Insurance Commissioners' (NAIC) refund calculation methodology; (8) a number of policies had a cumulative loss ratio--the factor used to measure compliance--above that required under NAIC's refund calculation method; and (9) a primary reason for requiring refunds was to give insurers an incentive for meeting loss ratio standards, and the high proportion of premium dollars for policies doing so indicates the incentive is working.