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Managing Medicare's Costs

Would community rating be a good thing for Medigap policyholders?

In most states a 65-year-old man will pay 8% higher premiums for a Medigap policy than will a 65-year-old woman. An 80-year-old senior will pay premiums that are 52% higher than if he or she were age 65. That’s according to a recent Kaiser Family Foundation analysis of Medigap Plan F pricing.

Also, when people wait until after their initial six-month enrollment period has passed, insurance companies in all but eight states will charge higher premiums or even decline coverage for those with pre-existing conditions.

These types of restrictions are unique to Medigap policies. They are the only Medicare supplemental coverage that’s allowed to discriminate on the basis of age, gender, and health. And for many observers, setting Medigap premiums based on things people can’t control is unfair.

Last year, for instance, a New York Times/CBS News poll found that 85% of those surveyed supported a provision in the Accountable Care Act prohibiting insurance companies from charging higher premiums or denying coverage to people with pre-existing conditions. An evidence of that provision’s popularity is that it was the was the only major requirement in the Health Reform law that was endorsed by both President Obama and Mitt Romney.

When insurers can no longer consider health status, they are said to “guarantee issue” policies. Next year all commercially sold health insurance coverage in this country, with the exception of Medigap policies, will be guaranteed issue. Consequently Medigap policies will be the only kind of health insurance allowed to medically underwrite policies or, once the initial six-month open enrollment period has passed, charge unrestricted premiums to older retirees who are either buying their first Medigap policy or trying to switch from a different insurance company.

In contrast, the Accountable Care Act does away with pricing for pre-existing conditions and it caps age adjustments, limiting premiums for people who are not eligible for Medicare to no more than three times the premiums paid by young people. But those requirements don’t apply to Medigap policies.

A few policy analysts believe that Congress will eventually be forced to extend these same provisions to seniors buying Medigap policies. If someone younger than 65 doesn’t have to worry about being priced out of the market because of his or her age or a pre-existing health condition, is it right that older people are the only ones left unprotected? Because of seniors’ voting clout and their powerful advocacy groups, they think it’s inevitable those same protections will be extended to Medigap purchasers.

As insurance companies are precluded from making age, gender, and health distinctions, actuaries may see their careers vanishing. Highly trained specialists whose recommendations ultimately determine premiums, actuaries help make insurance markets relatively efficient. Many have undergraduate degrees in actuarial science and years of experience in statistics, probability, and projecting contingent risk, i.e., the risk that when an event occurs (a 75th birthday, for example), then a second event (e.g.,a heart attack) will also occur within a year.

It’s been said that if a thousand 65-year-olds are gathered in a large room and they each answer seven questions about their health, an experienced actuary can take their answers and after some number crunching, predict the number in the room who will die per year over the next 25 years with 95% accuracy. Life insurance and pension actuaries routinely do those kinds of calculations for a living.

Actuarial skills are less needed when laws require community rating, which means that people in the community pay the same premium regardless of their age, gender, or health status. The pure definition of community rating is rarely used in practice, and insurance companies typically have some leeway to tweak premiums based on limited criteria. As an example, the Accountable Care Act says that people cannot be charged more because of their health, but it also allows some premium adjustments for age, family size, smoking, and geographic area.

Eight states already have some form of community rating for Medigap policies. Of these, New York comes closest to having a pure community rating, with insurers allowed to adjust their premiums only for geographic area. Otherwise, an insurance company in New York is required to charge everyone buying a Medigap policy the same premium, whether the buyer is age 65 or age 90, male or female, smoker or non-smoker.

New York also illustrates the perils of community rating. Its Medigap and other health insurance premiums are among the highest in the nation. When its community rating and guaranteed issue law went into effect in 1993, it was among first of a handful states to require these protections (two states tried and later abandoned community rating). By 1995, New York’s premiums had jumped 20% and most insurers had stopped writing individual policies. In 1996 the state revised the law in the first of a series of attempted fixes that didn’t address the underlying problem – people often waited until they had health problems or needed medical treatment before they bought insurance. Because there was no requirement they buy insurance, many didn’t.

It’s still the case, and will be next year as well, that New York seniors can buy a Medigap policy at any time, although they may have to wait until year-end to disenroll from an Advantage plan. Because Medigap policies are expensive in New York, many individuals choose Advantage plans during their younger, typically healthier retirement years. They know that they can later buy a Medigap policy that provides first-dollar coverage without paying higher premiums than if they were newly minted 65-year-olds.

While New York seniors may find it financially smart to defer their decision to buy a Medigap policy, insurance companies wind up with disproportionate numbers of older and less healthy policyholders. That would be true in any state that does not have a requirement to buy insurance. One academic study found that after the Massachusetts health reform law went into effect in 2006, the hospitalization rate among the insured population dropped. Healthier people had waited to buy a policy until the Massachusetts law’s mandate forced them to.

The Accountable Care Act has an individual mandate to buy insurance. Without it, the law’s community rating and guaranteed issue requirement would result in policies that would be priced out of many people’s reach. In their arguments before the Supreme Court last year, lead attorneys on both sides of the case said that minus the mandate, the law would not be effective.

The insurance industry agreed. A few months before last year’s Supreme Court ruling, the industry group America’s Health Insurance Plans (AHIP) released a 52-page state-by-state analysis of insurance premiums and coverage in the states that require community ratings. The analysis was performed by Milliman, a large actuarial and healthcare consulting firm. The analysis documented the higher costs in these states. As AHIP’s press release said, the Milliman study concluded that community rating and guaranteed issue without a mandate drives up costs and reduces competition as companies stop selling policies.

Yet it’s hard to see how there can be a mandate that seniors buy a Medigap policy. Almost 80% of them have other types of coverage that is subsidized by employers and government. As it is, actuaries substitute for a mandate – without them, more people would delay getting coverage. There’s also an implicit mandate, since in most states people may be at risk of not being able to buy a cost-effective policy if they don’t get it during the first six months they’re enrolled in Medicare.

Still, the current system can be unfair. When people with serious health issues who purchase their policies during their initial six-month guaranteed issue period later find themselves trapped in a high-cost plan, they may have few options. A partial solution could be to enable seniors them to get the same or a lower-level plan than the one they now have (Plan F, for example) from another insurer for the same premium it would charge a healthy person of their age and gender. California, Maine, and Oregon already do that, although California and Oregon limit the switching period to one month each year. ◊◊

This is the second of three posts about Medigap policies.

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