Understanding different Medigap underwriting approaches
Gary: Regarding Medigap rating approaches, it appears that community rating is superior to the issue-age or the attained-age rating. I reached this conclusion based on that fact that it is not age related, like the attained-age approach, and not individually health related, like I assume the issue-age rated approach to be. Am I correct here?
Phil Moeller: When a person first becomes eligible for Medicare, they normally have what’s called a guaranteed access period for Medigap. During this period, Medigap insurers are not allowed to discriminate against an applicant based on their health. Having said that, the prices of both issue age and attained age policies may be affected over time by the generally poorer health of pools of older policyholders.
Here are explanations of these approaches that were provided to me for research on my Medicare book. I found them helpful, and hope you do, too:
Attained age rating, when structured properly, reflects the underlying costs for each age. This rating type is used frequently since it is least expensive for younger insureds (e.g., age 65), even though it is most expensive for older insureds. While this structure may provide the lowest rates for someone first eligible for Medicare, rates increase over time for both aging (about 2% to 4% per year up to age 80 or 85) and inflation. At older ages, it may be challenging to pay the higher rates required. For those who want the lowest rates now and who may not expect to live long, attained age rating may provide the best value.
Issue age rating charges a rate that’s a little higher than the cost of benefits during the first few years and invests the excess in a reserve that grows with interest and survivorship. (Survivorship means that the reserve for people who die or terminate their coverage is shared among those who remain.) In later years when the issue age rate is not enough to cover the cost of benefits, the reserve is used to help fund the difference. This structure has a higher initial cost than attained age rating and is not used often except in states that require it (Florida, New Hampshire) or prohibit the use of attained age rating (several states including Idaho). Rates increase for inflation but do not increase due to age. With issue age rating, people enrolling at older ages pay higher rates than people enrolling at younger ages. Issue age rating helps members avoid the higher rate increases associated with attained age rating and can provide excellent value for those who expect to continue their insurance for many years.
With pure community rating, everyone in the community pays the same amount for their plan. (A state may have more than one community, defined by geographic region within the state.) Similar to issue age rating, younger insureds pay more than their average cost of benefits, while older insureds pay less than their average cost of benefits. Unlike issue age rating, there is no reserve build up since today’s younger insureds are subsidizing the extra costs for today’s older insureds. Community rating is required in seven states: Connecticut, Maine, Massachusetts, Minnesota, New York, Vermont and Washington. Pure community rating is not often used in states where it is not required, since community rates are higher for younger insureds than attained age rates and issue age rates. Modified community rating may include rates that vary within the community based on factors other than age. Rates under modified community rating can be competitive with attained age and issue age rates, and can provide excellent value for people of all ages.
