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Healthy people pay 16% too much for their Medigap policies and unhealthy people pay twice as much as they should. That’s what an economist from the University of Pennsylvania found in a recent analysis of the difficulties people encounter in buying Medigap policies. People usually have to answer health-related questions before being told how much the premium will be. And health problems will usually result in higher premiums. There are only two exceptions: 1) during the 6-month period after someone first enrolls in Medicare, insurance companies cannot medically underwrite Medigap policies, and 2) a few states have community-rating laws prohibiting health-dependent premiums. This paper found that after the initial six month period has passed, people typically do not buy Medigap policies from the lowest-premium insurer because each company has its own underwriting standards and it is time-consuming to get multiple quotes

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Medicare beneficiaries spend 14% of their incomes for health care, according to an analysis by the Kaiser Family Foundation. That’s nearly three times the percentage that people younger than 65 pay. Even though the overall average is 14%, there’s substantial variation among age groups. The youngest seniors ages 65-69 spend only 11.5% of their budgets on health care, while those ages 75-79 spend more than 16% of theirs. The higher percentage for older seniors is because as a group they use more medical services and have lower incomes than younger seniors. Research also found that almost two-thirds of costs are for health insurance premiums. The second largest component is cost-sharing for medical services, which represents 18% of seniors’ health care costs. The findings were based on 2012 data.

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The AARP Public Policy Institute issued a report indicating that healthcare costs are consuming ever-larger portions of middle-class household budgets. The report noted that one-half of people ages 65-69 spend more than 11% of their incomes on health care, and that more than one-half of those ages 80-84 spend 23%. The report was written by Harriet Komisar of Georgetown University. Link to the report.

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Medicare Advantage plans’ quality ratings may be having a positive effect on seniors’ enrollment choices, according to a study published in JAMA, the journal of the American Medical Association. The study’s authors examined the choices of more than 950,000 first-time Advantage plan enrollees and another 320,000 people who switched plans. They found that a one-star higher rating translated to a 9.5% greater likelihood that someone would choose a plan. Thus people were 19% more likely to enroll in plan with a five-star rating than a plan with a three-star rating. Link to abstract of the study.

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A March 2013 article in the Yale Journal of Health Policy, Law, and Ethics examines the reasons for the continuing decline in employer retirement healthcare coverage. The authors point out that employers often trim health benefits for retirees rather than for current workers because younger workers might leave for jobs with better health coverage. Moreover, many large industries (think manufacturing) have downsized to the point that retirees heavily outnumber current workers, incentivizing firms to cut health benefits for retirees. Link to the article.

Not counting premiums, five percent of Medicare enrollees paid more than $5,000 in 2009, according to Congressional testimony by Glenn Hackbarth, Chairman of the Medicare Payment Advisory Commission (MedPAC). Hackbarth recommended re-designing Medicare’s benefits. Most seniors would have less out-of-pocket risk but would pay more for some services in the MedPAC proposal. Hackbarth said the proposed redesign is actuarially equivalent to today’s design. Link to the testimony.

Managing Medicare’s Costs

  • Finding ways to save money on Medigap policies (2 of 2)

    Medigap policies are the easiest-to-understand type of Medicare supplemental coverage. That’s because they almost never change their benefits. Six of the ten Medigap plans have the same benefit designs that they had 25 years ago — other than for a few tweaks that resulted from changes in Medicare’s benefits. And the coverage of the other four Medigap plans has not changed since they first came on the market in 2010.

    While their coverage is easy to understand, Medigap policies’ pricing is confusing. Here’s an example: if you are a 65-year-old San Francisco resident enrolling in Medigap Plan N, for instance, you may pay as little as $1,117 a year or as much as $1,807 a year, according to quotes from CSG Actuarial.

    Thus if you buy your policy from the most expensive insurer, you’ll pay 62% more than if you choose the least expensive company – even though the coverage is identical.

    Why do premiums vary so much? One answer is that insurance companies know that some retirees do not shop around before buying a policy. A handful of insurers may intentionally overprice their Medigap policies because they are willing to sell fewer policies so long as the ones they do sell have hefty profit margins.

    Another reason is that smaller, less well-known companies may have to offer larger commissions to entice insurance agents to sell their policies, and that added cost is reflected in steeper premiums. Still another reason is that when insurance companies are losing money on their Medigap policies, perhaps because of past underwriting errors, they have no choice but to hike premiums.

    Companies use one of three different rating methods when they set premiums. The most common one is the attained-age rating, which raises your premiums by about 3% for each additional year of age in addition to an annual increase to account for for health care inflation. Attained-age policies are usually the best deals for young retirees but can be pricey for older people.

    The issue-age rating method, on the other hand, raises premiums to stay even with medical inflation but does not adjust them for age except when the policy is initially sold. Issue-age policies usually have higher premiums for younger retirees since future age increases have already been priced in. But issue age-policies should be less expensive for older retirees who purchased their policies years earlier. Six states require insurance companies to use issue-age ratings – Arizona, Florida, Georgia, and Idaho. Missouri, and New Hampshire.

    The third method uses a community rating approach in which everyone pays the same premiums regardless of age or health. Like the issue-age approach, community ratings result in premiums that are expensive for younger retirees but relatively affordable for older people. The popular UnitedHealthcare (UHC) policies endorsed by AARP use a modified community rating in most states, although they will sometimes set their premiums higher or deny coverage to people who want to acquire a Medigap policy after their initial enrollment period has passed.

    So that their premiums will be competitively priced for younger retirees, UHC modifies its community rating by offering discounts of 3% a year for each year that the policyholder is younger than 75. This results in a 65-year-old getting a 30% discount, a 66-year-old a 27% discount, and so on until at age 75 the discount has vanished. Eight states require Medigap policies to be community-rated – Arkansas, Connecticut, Maine, Massachusetts, Minnesota, New York, Vermont, and Washington.

    In trying to protect yourself from sharp increases in premiums, it can helpful to know which ratings method an insurer uses. As an example, if you find an issue-rated policy that has lower premiums than an attained-age policy, it is expected to have lower premium increases over the long term than will the attained-age policy.

    But there are other factors which also play key roles in future premium increases. Companies that have conservative underwriting rules and low sales costs will have lower premium increases regardless of which ratings method they use. And state insurance regulators also play a role. The Florida Office of Insurance Regulation, for example, places caps on Medigap policies’ yearly premium increases.

    Here are suggestions about ways you may be able to save money when you are buying a Medigap policy:

    Compare premiums from at least three insurance companies. But which three companies do you call, since in many states 30 or more insurance companies sell Medigap policies? As a start, you can look at your state insurance department’s online premium comparisons for Medigap policies, which can be found at the bottom of this page.

    Most states list each company’s premiums for individuals of various ages (age 65, age 70, etc.) as well as its toll-free number. Even though some states do not regularly update their premium comparisons, they will give you an idea of the companies most likely to have lower premiums.

    The objective is not necessarily to buy your policy from the company that has the lowest premiums, but to buy from a company that has reasonably low premiums and that meets your other criteria, e.g., it is a large, well-known insurer.

    If you live in one of the few states that do not have the online comparisons, you can go to the Medicare web site to find a list of companies selling Medigap policies in your state. you might use the Medicare web site’s list of companies here. The Medicare web site does not show insurance companies’ premiums but it does list their toll-free numbers.

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