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Managing Medicare's Costs

Discounted Medigap premiums for the four newest plans

If you thought your health was beginning to slip, you’d likely buy the most comprehensive health insurance that you could afford. On the other hand, if you thought your health was good and would continue to be so, you might choose less expensive coverage.

This principle – that people in poor health move to the strongest coverage that’s available to them – leads to pricing discrepancies. Insurance companies know, of course, that individuals with health concerns usually gravitate to plans with the fewest and smallest gaps. And the insurers also understand that while people with serious chronic diseases comprise less than 10 percent of the total population, these same individuals can represent 15-20 percent of the policyholders of the most comprehensive plans.

Insurance companies protect themselves from this adverse selection by adding safety margins to the premiums of the plans with the best coverage. As an example, the most comprehensive Medigap plan is Plan F, which fills all of the gaps in Medicare-covered medical services. And based on its benefit design, Plan F’s premiums are higher than they should be (the same holds true for the other comprhensive Medigap plans).

If they don’t have employer plans, retirees with serious chronic diseases almost always buy Plan F (or in a few states, Plan C) if they can afford its premiums. Plan F is the most widely sold Medigap plan, and the 3.5 million or so people who own it are slightly less healthy than would be expected for randomly selected group in the same age range.

Fortunately for consumers, Plan F’s popularity among healthy as well as less healthy retirees means that virtually all insurance companies sell it. In this way, the substantial competition in the Plan F market helps to restrain its premiums, although not enough to fully compensate for its overpricing.

For retirees looking for less expensive coverage, it is worthwhile to contrast Plan F’s premiums to those of the four newest Medigap plans (Plans K, L, M, and N), all of which require greater cost-sharing and shift some risk away from the insurance company. And all four of the newest plans typically have premiums that are lower than their benefit designs justify. The reason is that insurance companies know that these four plans will attract people who will file few medical claims.

Plan N is a good example. According to Milliman Inc.’s Health Cost Guidelines, Plan N’s benefits are about 72 percent of Plan F’s benefits. Thus, Plan N’s premiums should be roughly 28 percent lower than those of Plan F. But in practice, Plan N’s premiums are often lower by 30 percent or more.

In North Carolina, for instance, the average of Humana and UnitedHealthcare’s Plan N premiums is 33% lower for a 65-year-old than the average of the same two companies’ Plan F premiums. And in Missouri, for a 65-year-old man the average Plan N premium for three large insurers — United of Omaha, Colonial Penn, and Oxford Life – is 35% lower than the average Plan F premium for these same three companies.

The size of the discounts will vary by insurance companies, which take several factors into account when setting premiums. But for the four newest plans, most carriers have premiums that are lower than would be predicted by the plans’ benefit designs. Based on their benefit designs, the discounts (relative to Plan F’s benefit design) should be: Plan K (54%), Plan L (73%), Plan M (84%) and Plan N (28%).

In addition, a few large insurance companies are making it easier for their policyholders to switch plans later. One large Medigap insurer promises its current policyholders that they can change plans in the future without going through the underwriting process.

When given the assurance that they can freely upgrade plans later without underwriting, healthy policyholders can with little risk save thousands of dollars in premiums over several years, partly by accepting some risk and partly by taking advantage of discounts often available in the premiums of Plans K, L, M, and N.

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