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Managing Medicare's Costs

Medigap policies (2 of 3): Pre-existing conditions and the risks of going through underwriting

The best time to purchase a Medigap policy is during the first six months you’re enrolled in Medicare. At least that’s what consumer publications say. In most states that initial six-month period is the only time that insurance companies cannot deny you coverage or charge you higher premiums because of health problems.

So it may be good advice to buy a Medigap policy on day one if you have a serious pre-existing condition, cannot find an Advantage plan you tolerate, or are rich enough that you’re not concerned about how much a Medigap policy will cost you during retirement.

On the other hand, the advice to buy a Medigap policy early on can be odds with a basic tenet of financial planning – to match the client’s needs to the solution. With investments, for example, a wealthy 75-year-old should probably not have the same asset allocation as a 75-year-old living on a modest income. The principle applies to insurance as well. Healthy retirees don’t need overly comprehensive insurance, which is the most expensive kind, but they do need protection from large losses.

By waiting ten years to switch to Medigap coverage, a 65-year-old retiree will save more than $20,000. People concerned about outliving their savings may have no choice but to enroll in Advantage plans. Others, though, would likely wait until they need a Medigap policy if they didn’t have to worry about later paying exorbitant premiums because they have pre-existing conditions.

One reason that Medigap premiums are high is that sick people flock to these plans. That’s a talking point of the insurance industry as it tries to stave off efforts to introduce more cost-sharing to some comprehensive Medigap plans. They argue that the apparent overuse of medical services by policyholders is because as a group they are are less healthy and require more care. If that’s an accurate assessment (and not all studies agree that it is), it helps explain why premiums are high.

Despite the high costs, some younger and healthier retirees believe that they have little choice but to purchase a Medigap policy or else they may pay much stiffer premiums later. In some cases, they are right. If you rely on the Medigap underwriting guidelines of Premera Blue Cross Company in the state of Washington, you’ll conclude that very few seniors would be able acquire a Medigap policy without some form of guaranteed access. Premera’s guidelines list 97 health conditions that will likely result in a denial of coverage, including common ones like diabetes, high blood sugar, and coronary artery disease.

Yet it’s not as grim as Premera’s guidelines make it out to be. For example, UnitedHealthcare publicizes the fact that it accepts more than 99% of all Medigap applications (a 2009 CBS Money Watch article said that the exact number was 99.94% in 2008). Because they tend to dominate the market, UnitedHealthcare’s Medigap policies, which are endorsed by AARP, are able spread claims costs over a base of three million policyholders. Also, the 99% rate includes many people whose premiums are higher as a result of being medically underwritten. It’s unlikely, therefore, that people will be refused coverage, but they might have to pay higher premiums.

Industry-wide, about 15% of Medigap applicants are turned down, according to a survey by CSG Actuarial, a consulting firm. The survey results also showed that between 40% and 60% of policies, depending on the company, are underwritten (the remainder are guaranteed-issue policies, which are not underwritten).

Thus a large slice of the Medigap business comes from people who buy their policies after their initial enrollment period has passed. The CSG Actuarial survey also found that 96% of Medigap insurers use health questions to underwrite policies, with an average of just over five questions asked of each applicant.

Looking ahead a few years, it seems inevitable that people will no longer have to pay higher premiums or be denied coverage because they have serious pre-existing conditions. If the Supreme Court does not overturn the Health Reform Law’s prohibition against insurance companies taking into account pre-existing conditions, then in 2014 Medigap policies will be the only coverage in which companies can say no to unhealthy people or charge them more. If that happens, it won’t take long for advocacy groups to point out that seniors are being discriminated against.

Moreover, a provision in the new law has already gone into effect that bans insurers from denying coverage to children under 19 because of pre-existing conditions. Also, three years ago a Time Magazine SRBI poll found that 80 percent of the people surveyed said insurers should be required to offer coverage to anyone, regardless of health. Recognizing a broad consensus when they see one, political leaders of both parties have said that insurance companies should not be allowed to turn sick people away or charge them more.

At some not-too-distant point, then, seniors will no longer be medically underwritten and Medigap premiums will rise because policyholders as a group will be less healthy. The tradeoff is that people will also have the option of waiting several years to buy their policies. Retirees presently have this flexibility in the seven states that require community rating of Medigap policies (Connecticut, Maine, Massachusetts, Montana, New York, Vermont and Washington).

In the meantime, what’s the proper strategy? First, determine whether you can afford the long-term costs of a Medigap policy. If you can buy Plan F for $150 a month in your state, you can estimate approximately what it will cost over the next 20, 25, and even 30 years. If you want to be conservative, use a 6% annual growth rate for premiums, or 4% if you’re an optimist.

A middle-of-the-road five percent growth rate is a reasonable assumption, in which case 65-year-olds will pay $120,000 in Medigap premiums if they live to age 95. That could turn out to a best case, though. If Medigap policies are prohibited in the next few years from providing near first-dollar coverage, premiums will drop but cost-sharing will increase by a greater amount. Also, the $120,000 projection doesn’t include Part B and Part D premiums, cost-sharing for prescription drugs, and dental and vision care. After you add these, the total cost if you live to age 95 grows to $200,000 or more, depending on the prescription drugs you take.

If you’re in good health, you can wait several years to buy a policy, assuming that Congress will eventually remove the risk posed by pre-existing conditions. You can also buy a less comprehensive Medigap plan now, which gives you the flexibility to choose almost any provider but requires some cost sharing. Another option in some parts of the country is to buy a Medigap Select policy, which is 15% less expensive than a regular Medigap policy but has the same benefits. ◊◊

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