By Donna Smith

WASHINGTON (Reuters) - Medicare supplemental health plans, popular among politically powerful retirees, could come under the budget knife being wielded by the special deficit-reduction panel of Congress, according to sources keeping close watch on its work.

The so-called "Medigap" insurance plans shield the elderly -- many living on fixed incomes -- from costly deductibles and other expenses not covered by the traditional fee-for-service Medicare healthcare program.

"This one is clearly on the table," said a lobbyist who has been following "super committee" deliberations on ways to trim federal budget deficits by at least $1.2 trillion over 10 years.

But super committee Democrats are unlikely to vote to saddle retirees with new out-of-pocket expenses if Republicans refuse to embrace tax increases for the wealthy.

While the elderly buy the private plans, studies suggest they boost government Medicare costs as the extra coverage for deductibles and co-pays encourages greater use of medical services. That, in turn, pushes up costs for Medicare, which has to pay for its portion of the care.

As a result, proposals to limit the plans have been included in a number of deficit reduction packages, including one proposed by President Barack Obama.

A congressional aide, who did not want to be identified, told Reuters it was one of the ideas being reviewed by the super committee.

Medigap plans are popular among people who choose not to enroll in Medicare Advantage plans, which deliver Medicare benefits through private insurers, or have no employer-backed retirement health benefits. Some Medigap plans pay nearly all the relatively high Medicare cost-sharing requirements.

The federal government already regulates Medigap plans, which are offered by insurers such as United Healthcare Insurance, a unit of UnitedHealth Group Inc, and Bankers Life and Casualty Company, a unit of CNO Financial Group Inc..

Of some 46 million people enrolled in Medicare, about 9 million have signed up for one of 10 standardized Medigap plans. A majority are enrolled in plans with little or no deductibles or cost-sharing requirements, according to the Kaiser Family Foundation.

ON THE TABLE

Budget analysts argue that getting "more skin in the game" by requiring Medicare enrollees to pay a share of costs that otherwise would be covered by Medigap plans would discourage unnecessary visits to the doctor.

In his submission to the super committee, Obama proposed a 30 percent surcharge on premiums for new Medicare beneficiaries who buy low deductible Medigap plans starting in 2017.

The non-partisan Congressional Budget Office said Obama's proposal saved an estimated $2.5 billion over 10 years. But the budget savings would grow over time as new Medicare enrollees turn to higher deductible Medigap plans to save money.

More far-reaching proposals that would affect current holders of low deductible Medigap plans would save even more -- as much as $93 billion over 10 years, according to the CBO.

The six Democrats and six Republicans on the super committee have until November 23 to develop a deficit-reduction plan. If it fails, a similar amount of across-the-board spending cuts would be automatically triggered starting in 2013. Congress will have one month to vote on any super committee deal.

DISCOURAGING NECESSARY CARE

Obama's bipartisan fiscal commission last year suggested requiring a $550 deductible on Medigap plans and limiting coverage on the next $5,000 of costs to 50 percent. CBO said such a plan would save about $53 billion over a decade.

The health insurance industry and healthcare advocates oppose moves to restrict Medigap plans. They argue that limiting coverage would not just discourage unnecessary doctor visits, it would discourage necessary care.

"My hope is that Democrats are going to be loath to make changes in something that deals with out-of-pocket expenses for seniors and I believe they will be," said Ron Pollack, executive director of Families USA.

The National Association of Insurance Commissioners wrote the super committee last month to urge the panel to avoid changes that would affect current policy holders.

"An abrupt alteration of the Medigap cost-sharing benefits for in force policies will cause a major market disruption and cause serious confusion for seniors," the group wrote.

The insurance commissioners also noted that two new types of Medigap policies, which require higher cost sharing, were introduced into the market only last year. More time is needed to gauge their effect on the Medicare program, the letter said.

(Editing by Doina Chiacu)