Federal regulators say the new Medicare prescription drug benefit could hurt insurers that sell private Medicare supplement insurance.[@@]

The new drug benefit could affect 1.9 million U.S. resident who already have Medigap drug benefits, and it might cost the Medigap insurers as much as $2.5 billion in revenue in 2006, regulators write in a discussion that accompanies a package of proposed Medicare drug benefit program regulations.

Medigap sellers reported a total of about $17 billion in Medigap revenue in 2002, according to the National Association of Insurance Commissioners, Kansas City, Mo.

The effect on private Medigap insurers could swell to $3.2 billion in 2010, the regulators predict.

But the regulators are hoping that the insurers that sell Medigap coverage will reap some gains from other statutory changes in the Medicare program. If the insurers that sell Medigap jump into the new Medicare drug benefits and Medicare preferred provider organization markets, “this market entry might mitigate the revenue impacts on these insurers, and could even possibly produce a revenue gain for these insurers,” the regulators write.

The regulators say they are basing their projections on NAIC data.

On Monday, the Centers for Medicare and Medicaid Services, an arm of the U.S. Department of Health and Human Services, posted more than 2,000 pages of regulations and related discussions pertaining to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 on the agency’s Web site.

The agency has designated Julie Walton and Kathryn McCann as the contact people for questions about the Medigap provisions.

Some sections of the proposed regulations deal with the new Medicare drug benefit, but others deal with the transformation of the old Medicare + Choice managed care program into a new Medicare Advantage managed care program.

The old program worked mainly with health maintenance organizations, and a wave of federal budget cutbacks that started in 1999 saddled the private HMOs with big losses. Many managed care companies abandoned the program. Medicare regulators note in the analysis of the proposed regulations that the share of Medicare beneficiaries enrolled in Medicare managed care programs has dropped to 11% today, from a high of 16% in 1999.

Medicare regulators are hoping to entice private carriers back into the Medicare program by encouraging preferred provider organization plans to participate and offering other incentives for private insurers to take another chance on doing business with Uncle Sam.

In an economic analysis section, the agencies ask for comment about how the new, less costly options for Medigap coverage will affect small Medigap insurers.

The regulators suggest that MPDIMA might hurt small Medigap insurers by making it illegal for them to sell some types of Medigap policies to new enrollees. MPDIMA will prohibit Medigap insurers from selling new Medigap policies that cover prescription drugs after Dec. 31, 2005, and it will prohibit the renewal of existing Medigap policies with drug coverage for beneficiaries who enroll in the new Medicare Part D prescription drug benefit program.

“We emphasize that [the law] itself directly restructures the role of Medigap insurance, and that is not a result of the rulemaking,” regulators write.

At this point, federal agencies “have no reason to believe that the creation of the Medicare Advantage program will have positive or negative impact on ‘small’ insurance firms” other than Medigap insurers,” the regulators write.

Drafts of the new proposed regulations are on the Web at http://www.cms.hhs.gov/medicarereform/