These benefits typically pay for some or all of the costs not covered by Medicare, such as coinsurance, deductibles, and prescription drugs. In addition, the lack of a cost-sharing limit can leave some beneficiaries with extensive health care needs liable for very large Medicare expenses. The most notable omission in Medicare’s benefit package is coverage for outpatient prescription drugs. Current estimates suggest that the combination of Medicare’s cost-sharing requirements and limited benefits leaves about 45 percent of beneficiaries’ health care costs uncovered. Medigap drug coverage in particular offers only limited protection because of high cost sharing and low coverage caps. Remaining Gaps Leave Beneficiaries at Significant Risk

While Medigap policies cover some costs beneficiaries would otherwise pay out of pocket, Medigap policies have limits and can still leave beneficiaries exposed to significant out-of-pocket costs. First-Dollar Coverage Through Medigap Distorts Medicare's Cost Control Features

Even though Medicare’s original design has been criticized as outmoded, it included various cost-sharing requirements intended to encourage prudent use of services. Unlike Medigap policies, employer-sponsored supplemental insurance policies and Medicare+Choice plans typically reduce beneficiaries’ financial liabilities but do not offer first-dollar coverage.
Why GAO Did This Study

Medicare provides valuable and extensive health care coverage for beneficiaries. Nevertheless, significant gaps leave some beneficiaries vulnerable to sizeable financial burdens from out-of-pocket expenses. Medigap is a widely available source of supplemental coverage. This testimony discusses (1) beneficiaries' potential financial liability under Medicare's current benefit structure and cost-sharing requirements, (2) the cost of Medigap policies and the extent to which they provide additional coverage, and (3) concerns that Medigap's so-called "first dollar" coverage undermines the cost control incentives of Medicare's cost-sharing requirements.

What GAO Found

GAO found that Medicare's benefits package and cost-sharing requirements leave beneficiaries liable for high out-of-pocket costs. Medigap policies pay for some or all Medicare cost-sharing requirements but do not fully protect beneficiaries from potentially significant out-of-pocket costs such as prescription drug coverage. Medigap first-dollar coverage eliminates the ability of Medicare's cost-sharing requirements to promote prudent use of services.