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James Sullivan
The mysteries of Medicare supplement pricing revealed

Your clients may be drastically overpaying for the same Medicare supplement coverage available elsewhere. Here’s how to reduce the cost.

January 22, 2013
By James Sullivan, CPA/PFS

Would you willingly pay two times the price for the exact same product? Many of your clients may be doing just that. Welcome to the world of Medicare supplement pricing. These plans (also referred to as “Medigap” plans) pay for the “gaps” in Medicare coverage. Most participants in traditional Medicare purchase a plan, but a lack of competitive pricing information results in many Medicare beneficiaries’ paying much more for coverage than they need to.

Illinois provides a good example. According to information provided by CSG Actuarial (csgactuarial.com), at age 65 a new Medicare beneficiary has a choice between paying a monthly premium of $121.06 for coverage under Medicare Supplement Plan F from one insurance company or $259.15 for the exact same coverage from another company. Both companies are well-known, and both are ranked as financially strong by companies that rank insurance companies.

Is the coverage different? No, both companies are offering Plan F in Illinois. This means that, by law, the coverage provided has to be exactly the same. Does the more-expensive plan cover a less-healthy group—maybe it is less picky about who can purchase the plan at age 65? No, a new Medicare beneficiary must be issued a policy by any company doing business in his or her state (otherwise known as “guarantee issue”). This factor alone does not account for the pricing difference.

Is there a difference in the pricing methodology? No, both companies use the “attained age” method, meaning the premium is based on the applicant’s age. The premium will increase as the policyholder ages. The other popular methodology is “issue age,” which sets the premium at the age at which the policyholder first purchases the policy. If the initial purchase is made at age 65, the policyholder will pay the same premium as others who buy the policy at age 65 even as the policyholder ages. The premium will most likely still rise (as health care costs unrelated to age rise), but the increase would not be due to the policyholder’s increase in age. Attained age policies are usually cheaper at age 65 than issue-age policies but are typically more expensive at older ages than issue-age policies.

Experts attribute the difference to a number of factors—none of which relate to the coverage or the service received by the consumer. For example, two factors that impact the premium cost are:

  1. Higher operating expenses at one company versus another. As you’d expect, a well-run company that controls its costs better can offer a cheaper product. This includes commissions paid to insurance agents. To attract the attention of agents, companies will substantially boost commissions paid.
  2. Because of guarantee-issue rules, some companies end up with much-less-healthy policyholders than others. During the guarantee-issue period, companies cannot control who purchases their plan and who stays in their plan. As long as the policyholder pays his or her premium on time, less-healthy policyholders cannot be kicked off the policy even if their claims are much higher than average. These higher health care costs have to be passed on to the other healthier policyholders in the form of much higher premiums.

How to lower premiums

What strategy can a Medicare beneficiary use to lower the monthly premium? First, buy smart the first time. In other words, at age 65 the applicant has the broadest choice (thanks to guarantee issue) of companies and plans. Your client should use this as an opportunity to pick a financially sound insurance company with competitive prices, a low cost structure, and reasonable commissions.

What about the health of the other policyholders? Insurance companies only have to offer a guarantee-issue policy when a beneficiary first enrolls in Medicare. (There are some exceptions, such as when a 68-year-old retires and leaves a group health plan, in which case he or she has a special enrollment period.)

A few companies offer guarantee-issue policies to everyone over age 65. This has a tendency to increase the monthly premium since it is servicing a less-healthy group of policyholders. Other companies can choose to restrict policy issuance to those who pass their medical underwriting process—in other words to potential policyholders who do not have significant health problems (currently or diagnosed with health problems in the past). Purchasing a policy from a company that imposes medical underwriting standards won’t guarantee lower premiums for life, but it may help keep premium increases down.

Finally, encourage clients to shop around periodically to determine if there are cheaper alternatives. This is especially true for healthier clients. There are, however, enough differences in health underwriting standards that even a less-healthy client may find a less-expensive plan for which he or she qualifies. Compare pricing and plans—many times the company that sells the most policies in a geographic area does not offer the lowest monthly premium.

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James Sullivan, CPA/PFS, is a financial planner in Naperville, Ill., who specializes in working with individuals suffering from chronic illness and their families.

* The AICPA PFP Section provides information, tools, advocacy, and guidance to CPAs who specialize in providing tax, retirement, estate, risk management, and investment advice to individuals and their closely held entities. PFP Section members, including PFS credential holders benefit from elder planning information in the Resources section and in Forefield Advisor on the AICPA PFP website at aicpa.org/pfp. All members of the AICPA are eligible to join the PFP section. CPAs who want to demonstrate their expertise in this subject matter can apply to become a PFS credential holder.