HOW TO PREDICT MEDIGAP RATE INCREASES
We can never be sure which Medigap plans will increase each year or how quickly their rates will go up. However, we can use past statistics to predict Medigap rate increases. To give our clients our best guess, we look at historical and current data and have frequent conversations with insurance carriers.
There are three main reasons that an insurance carrier increases Medicare supplement premiums. Let’s take a look at each one.
This is certainly not the main reason a Medigap rate goes up, but it does contribute to rising rates. Most states use an attained-age rating system when setting premiums for their policies. The attained-age rating system gives you a certain rate when you enter the policy and then increases that premium at certain ages. Most of the time, beneficiaries won’t see a rate increase due to age until they’re around 69 years old. Starting at that age, the rate increases are typically around 1-2% each year.
An insurance company may also use the age-issue rating system where they base your premium on the age you are when you enter the policy. After that, the premium will never increase due to your age, but it can for other factors.
One other rating system that is not seen often is the community-rated system. This system uses groups of ages to set their rates. The group that you fall in dictates your premium.
So, the first way we can predict Medigap rate increases is to take a look at your age and which rating system your plan uses to set the premiums.
The Loss Ratio
These next two reasons for rate increases have the most effect on your premiums. The two contradict each other but work in tandem to calculate premiums. First, the loss ratio.
To begin calculating a company’s loss ratio, they look at one product in one state. They determine what percentage of overall revenue that product is generating and then goes towards policyholders’ claims. If that percentage is under a set threshold, the company is allowed to increase the plan’s premium. (On the contrary, if it’s over a set threshold, the company must decrease the premiums.) A majority of the time, the percentage lingers around the threshold or goes slightly over it, which means an increase of around 2-6% each year. However, there have been cases of a 25% increase for the disability supplements.
The company cannot increase prices without verifying its loss ratio with each state’s department of insurance. They also expect to lose some of their policyholders when they increase rates, so they do keep this in mind when calculating new premiums.
The loss ratio is calculated based on the health of everyone insured on that policy in one state. This fact suggests that larger companies that have bigger pools of beneficiaries should find it easier to sustain their losses and keep rate increases to a minimum.
An insurance company may also use the age-issue rating system where they base your premium on the age you are when you enter the policy.
The Shell Game
The shell game contradicts the loss ratio process. Insurance carriers who offer Medigap policies often have multiple companies under one umbrella. Rate increases that occur because of the loss ratio often do so because the age of policyholders increases. (As we get older, we often have higher costs for healthcare.) However, a company does not want to give that same high rate to new policyholders since that would deter them from choosing their company for a company with lower rates.
To fix this problem, as one of their companies begins to increase Medigap rates, they create a new company under the same umbrella and try to bring new (healthy) individuals into that new company. This gives them lower rates.
Of course, this doesn’t necessarily go unnoticed by older policyholders. Healthy individuals in the older company see lower rates and switch to the new company. (As long as they can pass medical underwriting, they’re allowed to make the change.) This leaves the older company with older individuals with medical conditions. As this population ages and gets sicker, rates will be driven higher and higher.
How to Apply This Information to Specific Medigap Plans
We can use some of these concepts to predict Medigap rate increases by the plans themselves.
Most Medicare beneficiaries who enroll in a supplement these days choose Plan G. The majority were choosing Plan F up until 2020, when that plan became no longer available to anyone who turned 65 after January 1, 2020. Remember, if you enroll in a Medigap plan as soon as you are eligible, you have guaranteed issue rights. No company can turn you down based on pre-existing health conditions, and you do not even have to fill out a medical history form. So, Plan G sees individuals of all health conditions enter the plan. The companies who offer Plan G are blindly accepting policyholders and have no idea what numbers to expect for future claim payouts. So, this causes two things to happen. First, the company may proactively increase its rates to help pay for future claims. Second, it may also increase their rates as they see the new claims come in. Plan G is predicted to have the fastest increasing premiums over the next several years.
If you see a big jump in your Medigap premiums, give us a call. We’ll take a look at the rates of other companies and help you determine if you may be eligible to switch companies or plans. Call us today and schedule your free consultation.