Medigap Pricing Methods Explained

Medigap plans are sold in three main premium categories: attained-age, issue-age, and community-rated. The insurance carriers get to decide what pricing method they want to use. The prevalence of these policy types varies by state, with certain types being more common in specific states. 

The pricing method of your policy plays a significant role in how your Medigap premiums are calculated. Among these, community-rated plans are generally simpler to comprehend, whereas attained-age and issue-age plans may require more detailed understanding. We’ll cover all three today.

Attained-Age Medigap Premiums

In attained-age Medigap policies, the premiums are directly linked to your current age, meaning they will rise as you get older. Generally, the increase in premium with each new year of age is modest. Besides age, these premiums may also go up due to factors like inflation. Thus, a policy that's more affordable at 65 will cost more at 75.

Consider the case of John, who enrolls in an attained-age Plan G at 65 for $120. On turning 66, his premium might increase to $125, and then to $130 at 67.

Issue-Age Medigap Premiums

With issue-age-rated Medigap policies, your premium is determined by your age at the time you apply for the policy. This means a 70-year-old will pay more for their policy at the start than their 65-year-old neighbor. Once the policy is in place, your premiums won't increase just because you get older.

While this might seem advantageous initially, it's important to note that premiums will still rise due to factors like inflation and increasing healthcare costs. Even though your age won’t directly cause your premium to increase, insurance companies do regularly adjust rates. This adjustment can happen for all policies of a certain type within a state, typically on an annual basis.

Let’s look at John again. He might buy an issue-age Plan G in June 2022 for $135. By June 2023, due to inflation, his premium could increase to $142, coinciding with his plan's anniversary. There might also be a statewide rate increase on January 1, 2024.

It's worth noting that not all insurance companies offer issue-age Medigap policies, and their availability varies by state. While states like Arizona, Georgia, Idaho, Florida, Missouri, and New Hampshire commonly have these policies, they are rarer in places like Texas.

Community-Rated Medigap Premiums

The third type of rating for Medigap policies is community-rated. Everyone in the community would be charged the same base rate if they enrolled in the same plan. Things like gender may not affect the rate at all.

There are only a few community-rated Medigap insurance companies out there. Usually, these companies offer discounts upfront for younger policyholders. However, the price increases as you get older because they reduce your discount as you age. We often also find the starting rate is higher than some of the other Medigap policies offered in the area. In the long run, these policies may not be as cost-effective as choosing the plan with the best rate when you first enroll and the most stable history of rate increases.

Medigap Rate Increases

It's crucial to grasp a key aspect common to all three types of Medigap policies: they are all subject to rate increases. These increases typically fall into two categories.

Medigap Premium Increases Due to Age

With advancing age, people often experience more health issues, prompting insurance carriers to adjust their rates annually around your birthday. This increment is usually a small percentage and is most commonly seen in attained-age Medigap policies, the predominant type of Medigap policy.

Medigap Premium Increases Due to Inflation

Healthcare costs in the United States are escalating rapidly. As medical expenses rise, so do the costs of Medigap claims. To keep pace, insurance companies frequently implement statewide rate increases on all types of Medigap policies. This is an effort to manage the rising claim costs.

Additionally, Medicare typically raises Part A and B deductibles each year. Many Medigap plans provide coverage for these increasing deductibles, depending on the chosen plan. Therefore, if your Medigap plan covers a higher deductible one year than it did the previous year, expect an upward adjustment in your Medigap rates over time.

Before these rate increases take effect, insurance carriers must submit their proposed rates to the state Department of Insurance for approval. Once approved, they will inform policyholders of the rate increase and its effective date through mail notification.

Which Medigap Pricing Method Is Best?

The choice of the most cost-effective Medigap pricing method can vary by state. In regions where attained-age policies are prevalent, these often turn out to be the most economical option for clients over time. Conversely, in states where issue-age policies are more common, these policies tend to be advantageous.

So, how can you choose the best Medigap plan? The key point to remember is that all three types of plans are subject to rate increases over time. Therefore, the optimal strategy is to select an insurance company that not only offers competitive rates currently but also has a track record of minimal rate increases.

If you're evaluating different policies, it's beneficial to seek assistance from an agency that can provide comprehensive financial histories, including the trends in rate increases for various carriers. This information is invaluable for making an informed decision about your Medigap policy and the provider you choose. Consider leveraging such resources for guidance in your selection process.