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Managing Medicare's Costs

Spending less for Medigap coverage

Let’s start with what’s widely known. People who own Medigap policies use more health care services than do people with other kinds of Medicare coverage (the only exception is Medicaid). This heavier utilization makes these policies expensive for seniors as well as for Medicare.

On top of that, people do not manage this coverage particularly well, further contributing to their high costs. A recent working paper (it can be downloaded here ) by a University of Pennsylvania economist estimates that healthy people pay 16% too much, on average, for Medigap policies while the unhealthy can pay up to twice as much as they should. These large discrepancies between what people actually pay and what they could be paying with a different insurer are an indication of the Medigap market’s inefficiency.

What are ways to save money when you want Medigap coverage? The standard advice is to compare premiums from different insurance companies, choosing the lowest. That’s good as far as it goes, but it’s just one element of a strategy to control Medigap costs throughout retirement. Your strategy should be based on your health, income, and the laws of your state, as discussed below.

But first some background. Generally, people with Medigap coverage are in poorer health than people with other kinds of coverage (again with the exception of Medicaid). That’s one reason, albeit not the primary one, that Medigap purchasers use more health care.

To illustrate, women who own Medigap polices are 50% more likely to have diabetes than are all women with fee-for-service Medicare coverage. And men with Medigap coverage are 65% more likely to have diabetes than are all men with fee-for-service Medicare, according to research.

Still, most studies have concluded that Medigap purchasers use more medical services even after adjusting for their health. A recent analysis, which controlled for people’s health, found that government spending for Medigap owners has increased almost a full percentage point faster each year than it has for other types of supplemental coverage.

If poorer health does not account for the extra use, what does? The problem with comprehensive Medigap policies is that the only cost that people pay is the premium. There’s no cost-sharing for exams, treatments and tests. So why not get an MRI instead of an x-ray, and why not get a second opinion for a minor ailment, since both are free?

Most Medigap purchasers, then, are insulated from the cost of services. Consequently they may decide, perhaps subconsciously, to use more and more health care. Also, their physicians may order profitable extra tests and office visits without worrying about pushback from patients concerned about costs.

The extent to which Medigap policyholders overuse health care is substantial. In 2009 the Medicare Payment Advisory Commission reported that the government spends one-third more on Medigap policyholders than it does on people with Advantage and employer coverage. A more recent estimate is that the government pays 22% more for health care for people with Medigap policies.

That last figure is based on research by economists Marika Cabral of the University of Texas and Neale Mahoney of the University of Chicago. Their analysis, which was adjusted for patients’ health, concluded that the government pays an extra $1,396 a year per Medigap policy. Multiply that by 10.2 million policyholders and Medigap overuse costs the government about $14 billion a year.

There’s near unanimity in both political parties that changes to Medigap policies are needed and probably inevitable. These yet-to-be determined changes will, in one way or another, require Medigap purchasers to pay more, possibly through premium surcharges. Cabral and Mahoney found, based on their modeling, that the surcharge amount should be 15%, which will discourage some people from buying Medigap policies while those who do buy will pay for the overuse associated with their coverage.

Meanwhile, you might consider these suggestions which, based on your income, health, and state laws, can help you manage your Medigap expenses:

Income: In early retirement Medigap premiums are typically inexpensive when compared to seniors’ incomes, but that changes over time since premiums grow faster than incomes. Before you get a Medigap policy, project how much it is going to cost you over the next 20 or 25 years. Otherwise you run the risk of someday having to drop your policy when its premiums become too steep for your budget.

Here’s what your projections might look like: if you are age 65 and buy a Medigap policy for a $190 monthly premium, which is the national average, in 20 years your premium will be $415 a month and in 25 years it will be more than $500 a month, assuming 4% annual increases. By then you’ll have paid out large sums — $68,000 after 20 years and $95,000 after 25 years. And remember that the Medigap projections don’t include Part B premiums, prescription drug costs, and expenses for dental and vision care.

Use your state’s current premiums as the starting point for your projection. Links to most states’ Medigap premium comparisons can be found at the bottom of this page.

After you project how much your Medigap policy will cost over extended periods, you may have second thoughts about buying a policy now, or at least a comprehensive one. Cost-saving alternatives are to enroll in a Medicare Advantage plan that has a high quality rating, to buy a less comprehensive Medigap policy like Plan L or Plan N, or to purchase a Medicare Select plan. Select plans have identical benefits to standard Medigap plans, but are about 15% less expensive. Their tradeoff is that you must go to a network hospital (except in emergencies) or in some cases to network physicians.

When you first buy a Medigap policy, shop around and choose a low-premium insurance company. Just as important, monitor your premium increases in future years. If they begin to climb quickly, see if you can save money by switching to a different insurer. Unfortunately, if you have a serious chronic disease it may be difficult to find a better deal if you have to answer questions about your health. There a 8 states, listed below, that provide you with certain protections which allow you to avoid medical underwriting.

Health. If you are in good health and want to have Medigap coverage, you can usually save money by choosing a less comprehensive Medigap policy like Plan L or Plan N. In those plans your premium savings are likely to outweigh the added cost-sharing. People with health problems flock to comprehensive plans like Plan F and Plan C, and you will be in a healthier pool of insured people when you buy a less comprehensive plan. And that should help to moderate your premium increases.

If you do select a less comprehensive plan and your health starts to worsen, you might think about switching to a more comprehensive plan. But even if you can’t find more comprehensive coverage that’s affordable, as long as you have Plan L or Plan N, you’ll be all right. The popular UnitedHealthcare/AARP policies allow you transfer from one plan to another without going through medical underwriting. So, if you buy Plan L today and 10 years from now decide to switch to a more comprehensive plan, you won’t be asked health questions.

State Laws. Several states require insurance companies to sell Medigap policies during specific periods after the initial six-month guaranteed issue period is past. New York and Connecticut provide the greatest flexibility. Neither state permits medical underwriting, and people can buy or change policies throughout the year. If you’re a severely ill 95-year-old, you’ll pay no more than a 65-year-old triathlon winner. This community rating approach means that policies are exorbitantly priced for 65-year-olds. Thus you might want to wait to get a comprehensive Medigap plan.

Six other states have laws enabling people with Medigap policies to switch to a lower-premium company. But the rules in these states are slightly different:

California has an 30-day open enrollment each year for current policyholders. It begins on their birthdays and is (cleverly) called the Birthday Rule. During this period current policyholders can switch to an equal or lesser benefit Medigap plan with no underwriting.

Maine has a “continuity of coverage” law enabling people to buy a Medigap policy without underwriting if they had previously purchased a Medigap policy during an open enrollment period and have not had more than a 90-day gap in coverage.

Massachusetts requires Medigap insurers to have annual open enrollment without underwriting during February and March.

Missouri law gives current policyholders a 60-day period each year to switch to the same level plan with another insurance company without underwriting. This period starts 30 days before and ends 30 days after the annual policy anniversary date.

Oregon has a Birthday Rule that’s the same as California’s.

Washington allows current policyholders to switch plans and insurance companies throughout the year without underwriting – as long as people are switching to a plan with equal or lesser benefits. ◊◊

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