Why Medicare Supplement (Medigap) Premiums Increase
And there it is, another letter in the mail informing you about a Medicare Supplement rate increase. UGH! Years of costly rate increases can be an economic hardship, to say the least. Unfortunately, rate increases are impossible to avoid, but there are ways to mitigate them.
The two primary factors that affect premiums are increases in inflation and health care costs. As the overall cost of health care rises, the insurance to cover the costs must also increase. Increases in health insurance rates are driven by a number of factors, including higher medical costs, increased use of health care services, new technologies, an aging population, and increased costs for prescription medicines. Historically, premium increases average about 6% to 10% a year.
Since plan costs vary based on the individual insurance company, other increases can occur. The insurance company-specific premium changes are an outcome of company costs and their “loss ratio”, which is the percentage of premiums that an insurance company collects that is returned to policyholders in the form of health benefits.
Health insurance involves a pooling of risk, so individuals pay a share of the pooled experience of a group of people, in exchange for getting the coverage they purchased. In this way, an individual does not have to pay the full rate for his/her medical expenses.
Insurance companies increase rates as their costs increase. For these reasons, an individual’s rates may increase even though he/she may not have had to file claims. Your rates may also be affected by whether you have an “open” or “closed” policy form. An “open” policy is one that an insurance company is marketing to the public, while a “closed” policy is one that the insurer no longer actively markets. The pool for an open policy tends to expand and to include younger, healthier people. In contrast, the pool for a closed policy tends to shrink over time and include a higher percentage of people with health problems, who use
more health care services. More health care services means higher costs for the insurer, which in turn means the insurer probably will raise rates.
The cost of your Medigap policy may also depend on whether the insurance company:
- Offers discounts (like discounts for women, non-smokers, or married people; discounts for paying yearly; discounts for paying your premiums using electronic funds transfer; or discounts for multiple policies).
- Offers an "early-enrollment" discount (typically a fixed percentage of premium that begins rolling off as you age).
- Uses medical underwriting (ask questions about your health conditions) that may impact the premium you pay. This is only allowed if you don't have a "Guarantee Issue Right" or aren't in a Medigap Open Enrollment Period.
- Offers a "high-deductible option" for Plans F or G. If you buy Plans F or G with the high-deductible option, you pay for the first $2,490 of deductibles, copayments, and coinsurance (in 2022) for covered services not paid by Medicare before the Medigap policy pays.
Medicare Supplement plans are standardized. Standardization requires that the basic benefits of each plan be identical, however, the premium each carrier sets for their Medigap plans varies. Each insurance company decides how it will set the premium for their plans. Each Medigap policy can be priced in one of three ways:
- Community-rated (also called "no-age-rated): Your premium isn't based on your age. Generally the same premium is charged to everyone who has the Medigap policy, regardless of age or gender.
- Issue-age-rated (also called "entry-age rated"): Premiums are lower for people who buy at a younger age and won't change as you get older. The premium is based on the age you are when you buy (are "issued") the Medigap policy.
- Attained-age rated (NOT ALLOWED IN ARIZONA): Premiums are low for younger buyers but go up as you get older. They may be the least expensive at first, but can eventually become the most expensive.
At the end of the day: Knowledge is Power. As always, if you have questions and/or concerns about the premiums you are paying, you should be reaching out to a trusted advisor to get information you need to feel comfortable with your health care coverage.
