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Managing Medicare's Costs

Medigap policies: tactics to improve your chances of buying an affordable policy in later retirement

With the exception of a few employer plans, Medigap policies are far and away the best type of Medicare supplemental coverage for people who use a lot of medical services or who have serious chronic diseases.

One of the virtues of Medigap policies is that they don’t have any network restrictions. That means you do not need referrals or prior approvals to get expensive treatments or second opinions. And that’s an important consideration if you schedule frequent visits with more than one doctor. Even better, with Medigap policies you are covered when you see any provider who accepts Medicare.

Medigap policies’ downside is that they are pricy. Enough so that if you have a Medigap policy and are in good health, you may want to ask yourself whether you’re paying for more coverage than you need.

Yet as they see the costs of their Medigap steadily increase each year, many seniors decide to switch to Advantage plans. Two years ago the Medicare Payment Advisory Commission reported that more than one-half of all new enrollees in Advantage plans were people who had switched from their fee-for-service supplements, which in almost all cases were Medigap policies. And the only reason someone would drop a Medigap policy is to save money.

Here’s an example of how much a Medigap policy can cost in retirement. In most states if you have just turned 65 you can buy Medigap Plan F, the most widely sold of the ten plans, for about $2,300 a year. Add to that $1,260 or more for Part B premiums and another $500 or so for a Part D plan, assuming that you take only one or two generic drugs. That brings your annual cost to roughly $4,000, or almost twice what a healthy person would pay in a good Advantage plan.

If you spend $4,000 a year at age 65 for your health care and your costs increase at an average annual rate of 4%, over the next 20 years you will pay almost $120,000 and over the next 25 years almost $167,000. And that doesn’t include the cost of services that Medicare doesn’t cover like routine dental and vision care, hearing aids, and over-the-counter drugs.

On the other hand, you might decide not to buy a Medigap policy until you reach your mid-70s or later. That can save you thousands of dollars if you don’t need expensive treatments. What’s more, the odds are pretty good that your health status is okay or better, since almost one-half of Medicare beneficiaries 65 and older rate their own health as being either very good or excellent.

One reason many people buy Medigap policies when they first enroll in Medicare is that they believe it may be the only time they can get an affordable policy. That’s because after Medicare’s initial six-month guaranteed issue period has passed, in most states if they have serious health issues they may not be able to buy an affordable (or any) Medigap policy.

So if you’re a younger retiree in good health, your dilemma is whether to buy a Medigap policy when you first enroll in Medicare or to wait. And by waiting, you are accepting the fairly small risk that you may not be able later to buy an affordable policy.

How big is that risk? It depends partly on where you live. In New York state you can buy a Medigap policy at any age without answering health questions, but in Texas (and most other states) you will have to answer questions about your health before you know whether you can get a policy and how much you will pay.

If you’re older and want to know if you can get a Medigap policy at a reasonable premium, your first step could be to contact your nearest Medicare counseling agency. There you can find out whether in your state you are entitled to any guaranteed issue rights to buy a Medigap policy. The state health insurance program website lists the phone numbers of each state’s Medicare counseling agency.

Here are four other ways you may be able to reduce the risk of being denied a Medigap policy after the six-month guaranteed issue period is past.

1) See if you can get a reasonable Medigap premium quote from a large health insurance company. Because they can spread risks over a greater number of policyholders, large companies are sometimes willing to accept applicants with health problems. An example of a large and reportedly lenient underwriter is UnitedHealthcare, which sells the Medigap policies endorsed by AARP that account for 30% of all Medigap sales.

Several years ago a CBS News Moneywatch article reported that more than 99% of people applying for the AARP-endorsed Medigap policies were accepted. At that time Aetna underwrote the AARP policies, but UnitedHealthcare has continued approving the vast majority of applications. Mutual of Omaha, Humana and Aetna are other large companies that sell Medigap insurance nationally.

2) If your application with a large company is turned down, enlist an independent agent to help you. Independent insurance agents represent multiple insurers and should have a good sense of the ones that are most likely to issue Medigap policies to older people who have some health problems. You’ll pay no more by buying a policy through an independent agent than if you purchase directly from the company.

A knowledgeable independent agent is often able to exploit the inconsistencies in insurers’ underwriting practices. In some cases they are able to find the one or two companies that will sell an affordable policies to older retirees with specific chronic diseases.

Last year GenRe, the reinsurance subsidiary of Berkshire Hathaway, conducted an underwriting consistency survey of insurance companies that sell Medigap policies. Participating in the survey were 113 underwriters employed by 23 companies.

The 113 underwriters all were given the same information about a hypothetical applicant for a Medigap policy and then asked whether the application should be approved or denied. The hypothetical applicant was a 75-year-old man who four years earlier had a malignant melanoma removed from his back.

The application included the man’s health profile and a list of the medications he was taking. It also mentioned that the man had not received chemotherapy or radiation treatments after the melanoma was removed.

The results revealed striking inconsistencies not only among companies, but among underwriters who worked for the same company. In 10 of the 23 companies surveyed, whether the application was approved or rejected depended on the underwriter who made the decision.

In four other companies, all the underwriters agreed that the application should be rejected, while in the nine remaining companies all the underwriters agreed that the applicant should be sold a policy. Given the widespread inconsistency among and within companies, an experienced independent agent is the person most likely to find the insurers that will approve a marginal application.

3) If your application is turned down, ask that it be reviewed by a different underwriter. Because of the inconsistency among underwriters who work for the same company, it cannot hurt to request that your application be re-evaluated by a different underwriter or by a company’s underwriting review panel.

4) If you suspect you may have been wrongly denied coverage because of an error in your medical record, request a free copy of your record from MIB at this web site. Formerly known as the Medical Information Bureau, MIB is a cooperative effort among 450 insurance companies to share medical data used in underwriting health and life insurance applications. By sharing information, MIB members can sometimes see when applicants have misstated their medical history or omitted a key piece of information. MIB will provide you with a free report each year, but you must request it.

Also, MIB will have your medical record only if you have applied for individual coverage such as a Medigap policy. It does not keep records for group plans or Advantage plans, neither of which require underwriting. And MIB retains your medical record for only seven years. ◊◊

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