BB’s Medigap Supplemental Insurance 101

Medigap supplemental insurance 101This brief summary about Medigap supplemental insurance is written to give you an overall picture from the individual’s point of view.  BB’s Medigap Must Knows below is the background you will need for my and Beyond ideas coming up soon. This summary is not meant to give you all the detailed information you need to make informed buying decisions. I have included some websites that do excellent jobs of summarizing the complex world of Medigap supplemental  insurance policies for the potential buyer at the end of this blog post. My recent research into this topic has taught me a lot I didn’t know even though I have been helping Donna (my mom) buy Medigap insurance for years.

Medigap Supplemental Insurance Basics

Medigap supplemental insurance policies are sold to traditional (original) Medicare-eligible beneficiaries to cover some (or all) out-of-pocket costs (deductibles, copayments, and coinsurance) in Medicare Part A (hospital) and Part B (medical) insurance. The Medigap policy is one of the ways for managing the financial risk associated with sudden, unaffordable out-of-pocket  health costs resulting from an unpredictable medical condition.   If you receive Medicare through a private Medicare Advantage plan, then you cannot buy Medigap supplemental insurance policies.

Medigap policies are often the traditional (original) Medicare beneficiary’s, supplemental health insurance of last resort when retiree health benefits, veteran’s health benefits, and/or low income/low asset public programs are not available or do not provide the financial protection needed. I say last resort because Medigap policies are not subsidized by employers and/or government like the other supplemental health benefits. In 2010, 9.6 million Medicare beneficiaries (about 20% of all beneficiaries) purchased Medigap coverage.

Medigap policies come in 10 standard Medigap plans (labeled A, B, C, D, F, G, K, L, M, and N) in all states except in Massachusetts,  Minnesota, and Wisconsin.

medigap supplemental insuranceAll Medigap policies with the same letter designation provide identical benefits and therefore apples to apples price comparisons can be made between them. The most popular (and expensive) policy is Medigap F, which pretty much pays for everything that Medicare does not— including both the Part A and the Part B deductibles (called “first dollar” coverage), copays, and coinsurance. Medigap F will not be available to new beneficiaries after 2020 as part of our government’s effort to tame the Medicare beneficiary’s uncontrollable desire to constantly seek medical care even for the most insignificant reasons (I’m only being factious, of course). Medigap C, the only other plan with “first-dollar” coverage will probably soon follow Medigap F for retirement.

Buying Medigap Supplemental Insurance Policies

Unlike for Medicare Advantage, the rules for Medigap supplemental insurance policies are not the same everywhere because the federal government sets only minimum rules to protect consumers and lets individual states do the rest.  Some states are more consumer-friendly than others.  Therefore when buying Medigap policies, it is important to seek advice from individual State Health Insurance Assistance Programs (SHIP)  for your state’s specific protections.

–Know Your Guaranteed Issue Rights

You have all probably heard about people being charged more (or even denied) health insurance because of pre-existing conditions. If you have guarantees issue rights in Medigap, this means that the insurance company must sell you a Medigap policy, must cover all your pre-existing health conditions, and can’t charge you more for a Medigap supplemental insurance policy because of past or present health problems. You cannot be asked any questions about the state of your health when buying Medigap under guaranteed issue. These are federal government rights that are exercised only during protected enrollment periods (within six months of signing up for Medicare Part B or under special situations). Some states (e.g., Connecticut) have increased enrollment periods with guaranteed issue rights for added consumer protection so check with your state rules.

–When To Buy

Unlike Medicare Advantage and Part D prescription drug plans, there is no annual open-enrollment season for Medigap policies. If the premium for your Medigap supplemental insurance policy is rising faster than you like (and you are relatively healthy), it might be beneficial to shop for a new policy rather than staying with the one you originally signed up for when you were 65.  Remember that without guaranteed issue rights, the insurance companies are free to charge you more, deny coverage for pre-existing conditions, and even deny you coverage completely if you are “riskier” than they want.

–Where To Buy

Medigap supplemental insurance policies can be purchased from independent insurance brokers or directly from the insurance companies that sell Medigap in your area. Independent insurance brokers, both online and with local offices for face-to-face consultation offer Medigap policies from several different companies and are paid through sales commissions.  If you are buying directly from the insurance company, then the government’s online list of companies is a good place to start. On Medicare’s website , go to Supplements & Other Insurance at the top and select Find a Medigap Policy. After you enter your ZIP code into the search box, you will see a list of  Medigap policies available in your area. You will have to contact the insurance companies listed directly to get their specific pricing information for your age.

BB’s Medigap Must Knows

Medigap health insurance policies are not managed health insurance plans like Medicare Advantage. They are more like a bookkeeping operation. After Medicare defines the benefits and pays its part of the bill, then the Medigap policy will automatically pay its part of the bill according to one of 10 standard plan definitions. After it has paid, Medicare even forwards the bill electronically to the insurance company administering the Medigap policy. Unlike Medicare Advantage plans, Medigap supplemental insurance does not require price-setting negotiations with healthcare providers or hospitals and there are no provider networks to set up. What can be a simpler and efficient insurance product?

Medigap supplemental insurance easy payment
Not surprisingly, the number of companies that sell Medigap is very large. If any are exiting the market, you do not hear about it all over the news media. When my mom goes to buy a Medigap F policy, she is presented with a list of 45 insurance companies on the government’s online list and many more from local insurance brokers.This must be a very lucrative (and competitive?) business.

So Why are Medigap Premiums So Expensive?

If the Medigap policies are so easy to administer, then why are they relatively expensive?  There are two reasons why Medigap policies are expensive:

  1. Too many small risk pools
  2. Medigap policies are allowed to charge up to 35% markups (medical loss ratio must be 65% or greater)
  3. Medigap policies penalize the sick and the older beneficiary

Medigap supplemental insurance polices so expensive

As I described in an earlier post, the smaller the risk pool (number of beneficiaries per policy group), the higher the premiums will be. In addition, the smaller the risk pool, the more likely the composition of the risk pool being impacted by high spenders (sick people).  The end result is higher premiums.

The amount that the insurance company can charge in premiums above and beyond the amount that they spend on health claims is obtained from an insurance industry calculation called the Medical Loss Ratio (MLR).  Obamacare has raised the markup allowed in Medicare Advantage plans and in all health plans sold on the new health insurance exchange to a maximum of 15%. (MLR= health claims paid/premiums taken in of at least 85%) and require insurance companies to issue rebates (or increase benefits) with the excess.

Insurance companies use three different ways of setting premium prices for Medigap supplemental insurance policies—community rated (the same premium is charged to everyone), issue-age rated (premium is based on your age when you buy the policy), or attained-age rated (premium starts low but goes up as you age). The rules governing them are determined on the state level. In some states you may have a choice of only one or two. Community rated policies cost more when you are younger, but are cheaper over the long haul. If you can predict a long life for yourself, then community rated policies are a better financial value than the others. All plans currently on the market increase as you and your risk pool ages.

While the difference between Medigap pricing options is good to know, let’s face it, people largely buy on price and often on what the insurance broker is recommending. Because of the price-sensitivity of Medigap buyers, community rated plans often offer discounted rates for younger member for a fixed time to reel in younger beneficiaries and once hooked, increase the premium price until it matches the community price. If you had the information readily available, the best choice of Medigap plan would be the one that offers the best rate when you first enroll and has a history of smaller rate increases for older members.

Helpful Websites

While the federal government’s website has Medigap supplemental insurance information, it is not in the most consumer-friendly format.  I would take the time to look at the Illegal Medigap practices.  Other sites include:

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