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Managing Medicare's Costs

Medigap policies (1 of 3): Ways that retirees may avoid steep premium increases

There’s a saying that state insurance regulators don’t hate high Medigap premiums, but that they do hate high Medigap premium increases. The reason is that above-average Medigap premium hikes lead to consumer complaints and front-page newspaper articles about older seniors who are forced by rising costs to drop their Medigap coverage. Because state insurance commissioners are either elected officials or are appointed by elected officials, they prefer restrained premium increases that limit potential complaints and negative publicity.

When retirees buy Medigap policies, they know how much they will pay in the first year. If they overpay, as many do, it’s their fault, just as it is if they overpay for a new Chevrolet. But there’s no easy way for them to know whether they’re being enticed by artificially low premiums to acquire policies whose future costs will turn them into failed bargains.

Let’s say that 65-year-old woman wants to buy a Medigap Plan F. She narrows her choice to two companies and then buys the policy from the company with a $140 monthly premium instead of the company with a $165 monthly premium. Her decision is reasonable, and she saves $300 in her first year. Even if the company she’s chosen consistently raises Medigap premiums by eight percent each year and the other company by five percent annually, her premiums will be lower every year until she’s 72, at which point the other company’s premiums will be cheaper.

Beginning in her seventh year as a Medigap policyholder, then, her annual premiums will be progressively higher than they would have been with the other company, assuming the same rates of increase persist and she doesn’t switch insurance companies. If the rates of premium increases continue to hold steady at both companies, by the time she’s 85 she’ll have paid $11,000 more if she stays with the company she’d initially chosen. By age 90, she will have overpaid by $28,000.

Granted, some of these assumptions are unrealistic. Companies don’t increase premiums by constant percentages. They are more likely to raise them by seven percent one year, nine percent the next, and then eight percent in the following year. But the other assumptions are not unrealistic.

Eight percent annual premium increases, for example, are not unusual. Last year the U. S. Department of Health and Human Services (HHS) released a study of Medigap premiums that showed, among other things, that the ten percent of policies that had the highest annual increases during a four-year period beginning in 2007 had average annual increases greater than 20 percent. Also, during those four years the state of Alabama’s annual Medigap premium increases averaged more than ten percent.

Retirees’ first line of defense from double-digit yearly increases is state insurance departments. Yet regulators have no way of protecting seniors from the excesses of Medicare’s fee-for-service spending approach, which is the primary driver of high Medigap premiums. According to last year’s report from the Dartmouth Healthcare Atlas Project, Miami had the country’s highest Medicare FFS costs per beneficiary in 2008 ($15,571) and San Mateo County, an urban area immediately south of San Francisco, had the third-lowest ($6,723).

Miami’s average Plan F premium for a 65-year-old female non-smoker is just over $3,100, compared to San Mateo’s $1,600. Even if you subtract 15% from Miami’s average premium to adjust for the fact that Florida requires companies use issue-age ratings (whereas only three companies in San Mateo County use issue-age ratings), Miami’s premiums are almost $1,300 a year pricier.

There’s nothing that Florida’s regulators can do about this. The responsibility for South Florida’s high fee-for-service costs belongs with Medicare and Congress. But state regulators can make sure that annual premium increases do not exceed the medical trend. The HHS report indicates that during 2007-2010, Florida’s annual premium increases averaged 3.7%. In states like Florida and California with large numbers of retirees and strong regulatory laws, insurance commissioners frequently deny requests for excessive premium increases.

In a few cases, the Florida Office of Insurance Regulation encourages companies to ask for larger increases than they initially requested so that their premiums will track the state’s medical trends. In effect, the regulators say to companies that are asking for increases substantially below trend, “You’d better ask for trend this year, because if you fall behind, you won’t be able to catch up in future years.” In doing this, they make it less likely that premiums will spike in any given year.

In some states, though, insurance regulation is lax. That may not be because the regulators are indifferent. Instead, the states’ laws may not provide them with the tools they need to control premium increases, and their only options are to nibble away at the edges of these increases. They may try to negotiate with the companies, but because they are handcuffed by their states’ weak regulatory codes they have almost no leverage.

Other than moving to a different state, retirees may be able in a couple of ways to improve their chances of buying a Medigap policy that will have stable future increases. The first is to purchase from larger insurance companies. The HHS study reported that the firms with higher numbers of Medigap policyholders have lower premiums and more predictable annual increases.

Large insurers have decided advantages here because their overhead costs as a percentage of premiums are lower. Another way of saying this is that companies with high medical loss ratios – usually large insurers — have greater capability to control premiums and annual increases. Medicare’s rules require that individual Medigap policies have at least a 65% medical loss ratio, or MLR, and group Medigap policies at least a 75% MLR. But companies with large numbers of enrollees typically have MLR’s that are 80%, 85%, and higher, which means that they can keep premium increases modest.

Nevertheless, buying Medigap policies from larger companies is not a failsafe method. United Life of Omaha, a subsidiary of Mutual of Omaha, and Blue Cross Blue Shield of Michigan – both of them sizable organizations, have asked for hefty Medigap premium increases in recent years.

Seniors should also be wary of rates that appear too good to be true. The Medigap market is moderately efficient, particularly in more heavily populated areas. A few companies, typically smaller ones, aggressively set their premiums for people who are age 65, but then to compensate will schedule rapid increases in future years. While some people will switch policies when premiums rise quickly, many will not.

The HHS study found that companies that price their policies using a group rating tend to have slow and steady premium increases. Depending on the state, there may be more than one insurer who uses group-rate pricing. UnitedHealthcare, which sells the most Medigap policies, uses a group rating except in those states that require insurers to use an issue-age or community rating when they set their premiums.

People with Medigap policies should also shop around when they are notified of a larger-than-usual premium increase. Companies that have double-digit increases in a given year are more likely to have them again in the future. In a majority of states, Medigap policyholders can switch insurers at any time during the year.

On an optimistic note, the HHS study indicated that between 2001 and 2010 Medigap premiums rose at an average annual rate of just 3.8%. To some extent the moderate growth in premium increases is linked to Medicare’s decelerating cost growth that began in 2008. When Medicare’s cost growth slows, it puts the brakes on Medigap premium increases.

But the Medigap premium growth rate reported by the HHS study is probably lower than the actual growth rate. While the study doesn’t explain its methodology in detail, apparently the findings don’t take into account the fact that during the decade four less comprehensive plans (K,L, M, and N) replaced more comprehensive plans, reducing the average premium.

The study did track premium growth in Plans C and F for 2007-2010, but lumped all plans together for the years between 2001 and 2010. As cheaper plans entered the mix in 2006-2010, the average premium per beneficiary in a particular year could not be compared to the next year’s average on an apples-to-apples basis. That could understate the average growth rate in premiums.

Also, Plans H, I, and J each saw their premiums decline by more than 10% beginning in 2006, when they could no longer offer drug coverage. Most people who owned these plans in 2005 switched in 2006 to the cheaper versions that did not include drug coverage. In 2010, these three plans, along with Plan E, were dropped from the Medigap lineup, although people who owned the plans in 2010 could keep them. ◊◊

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