Because traditional Medicare does not have an out-of-pocket maximum, beneficiaries often maintain supplemental coverage to minimize financial exposure and make costs more predictable. In 2021, 89 percent of enrollees in traditional Medicare had additional insurance; most purchased a Medigap policy (41%), while others relied on employer plans (32%) or Medicaid (16%).
Medigap plans can make traditional Medicare costs more manageable, but they lack federal consumer protections. Although section 1557 of the Affordable Care Act (ACA) prohibits insurers from engaging in discriminatory practices — like charging more based on health status, age, or gender, or curtailing coverage for preexisting conditions — those rules have not historically applied to Medigap plans.
This has allowed Medigap insurers to engage in discriminatory behaviors, including setting higher premiums for older adults and people with disabilities and refusing coverage based on medical history.
In narrow circumstances, Medigap plans must suspend some discrimination. Beneficiaries age 65 and older have federal Medigap guaranteed-issue rights for the first six months they have Part B, and for 63 days after rare triggering events, like their Medigap plan going bankrupt. During these periods, Medigap insurers cannot use medical underwriting or deny coverage, although they can charge more based on age or gender. Medicare enrollees under age 65 have no similar protections. States can create additional safeguards, but few have.
As a result, most Americans have limited access to affordable Medigap plans. Enrollment rights are highly restricted and do not preclude all insurer discrimination. Beneficiaries outside a buying window or under age 65 can be denied or priced out of policies altogether. Without Medigap coverage, it can be harder to pay for care and other needs, potentially leading to worse outcomes and lower quality of life.
Some people may turn to Medicare Advantage (MA), which, unlike traditional Medicare, does limit enrollees’ expenses. This is a draw for some people, but the annual cap is set at a level ($8,850 in 2024) that 95 percent of beneficiaries are not expected to meet.
Rule Changes Expand Discrimination Protections
New federal rules could better align some Medigaps with other coverage. Section 1557 prohibits discrimination based on race, color, national origin, age, disability, or sex, including pregnancy, sexual orientation, and gender identity in “any health program or activity, any part of which is receiving federal financial assistance.” In April, the U.S. Department of Health and Human Services (HHS) revised rules implementing this provision for clarity and legal consistency. The updated regulation expands 1557’s reach by explicitly applying it to health insurance companies that receive direct or indirect federal funding, and to all their plans if they are “principally engaged” in health care.
What Does This Mean for Medigap?
Medigaps are not federally funded. But many companies selling them offer products that are, like MA, ACA marketplace, and Medicaid managed care plans. For insurers that are primarily health-focused, section 1557 would apply to all their offerings, including Medigap.
This would prohibit discrimination by these insurers, but not broadly. Other Medigap plans, such as those from companies that primarily provide life, home, or auto coverage, would not be affected by 1557. They could continue discriminating based on age, disability, and sex.
The result could be a market with two sets of plans and rules. This landscape would likely increase consumer confusion, administrative burden, premium volatility, and plan instability.
How the Market Might Respond
States could avoid a split market by establishing nondiscrimination protections at least as stringent as section 1557. Congress also could intervene with legislation to bolster Medigap rights nationwide.
But if policymakers do nothing, plan and consumer behaviors would determine what happens next. Insurers subject to 1557 could not charge higher rates or limit benefits based on factors like age or risk being sued by the federal government for noncompliance. This could increase costs, especially relative to competitors still using discriminatory tactics. The 1557-compliant Medigaps could raise premiums to compensate, potentially pushing healthier beneficiaries toward lower-cost policies not subject to the new rule. These dynamics could skew the risk pool, drive up premiums for nondiscriminatory coverage, and inhibit competition, ultimately jeopardizing beneficiary participation.
Spillover effects are also likely. Affected insurers may seek savings outside the Medigap market by reducing coverage and care for other enrollees. For example, a company could cut its MA or Part D spending by making those benefits less generous, more expensive, or harder to use.
Will This Affect Medicare Advantage Enrollees?
In addition to pushing new Medicare enrollees toward MA for its cost cap, Medigap’s inadequate federal consumer protections make it difficult for beneficiaries to switch from MA to traditional Medicare as their needs and preferences change.
For instance, beneficiaries in poor health and at the end of life are disproportionately likely to leave MA. Our experience suggests these transitions are often to avoid MA-specific features, like provider networks and frequent service denials, which can be particularly burdensome as health needs rise. However, disenrolling from MA does not guarantee that beneficiaries can access Medigap coverage. The many beneficiaries who are unable to buy a policy due to medical underwriting, discriminatory premiums, or insurer refusals must choose between MA’s coverage restrictions and traditional Medicare’s uncapped costs.
A freer Medigap marketplace could mean easier, beneficiary-centered transitions; better access to care; and a more level Medicare playing field.
What Happens Now?
The regulations are set to take effect on January 1, 2025, with the HHS Office for Civil Rights in charge of oversight and enforcement. But legal challenges and recent federal court decisions could cause delays.
Legislative Solutions
While federal law has long allowed Medigap to discriminate based on age, disability, and sex, the final 1557 rule highlights this anomaly and the need for immediate solutions.
Statutory reforms, like applying section 1557 to all Medigap plans, setting standard nationwide premiums, and expanding enrollment rights for all beneficiaries, are necessary and overdue. These modernizations would make Medigap plans more equitable and available and sidestep the new rule’s potential confusion and uncertainty.
