Medicare Supplement premiums will probably increase over time, but the amount and timing depend on several factors. Some insurance plans will have increases simply because you’re getting older.
Insurance companies can raise premiums multiple times throughout the year. But Medigap companies try to limit increases to once a year, says Bill Gay, a licensed Medicare insurance agent and owner of Sun Coast Legacy Advisors.
Despite the limited number of price hikes, several factors affect how premiums will increase. They include the plan’s pricing methods, the company’s losses, and the rising cost of Medicare.
Pricing methods define if and how the monthly premiums will increase as you age. Medicare Supplement insurance companies price policies based on one of the following structures:
- Attained-age pricing
- Community-rated pricing
- Issue-age pricing
Attained-age pricing bases the premium on your current age. Each year, the premium increases.
Community-rated pricing doesn’t let your age affect your premiums. For this pricing structure, a 65-year-old applicant would be quoted the same rate as a 70-year-old. Although premiums do not increase based on age, they can increase based on inflation and other factors, like tobacco use.
Issue-age pricing bases the premium on how old you are when you buy the policy. The premium does not increase based on your age, but it can increase for other reasons.
The popularity of the three pricing methods differ across the country.
For example, in Florida, where Gay works, attained-rated pricing is not available. The same is true in Georgia, where Dan McBrayer works as a certified long term care insurance advisor. He usually sells policies with issue-aged pricing. If the policy uses factors other than age to determine premiums, other factors will determine the increases.
McBrayer said patient health factors, such as tobacco use, affect both the short-term and long-term cost of Medigap. One of his clients, a 66-year-old male smoker, paid $180 for Medigap Plan F. If he was not a smoker, McBrayer said his premium would likely be $20 to $30 less per month.
National statistics correlate with McBrayer’s findings. A Kaiser Family Foundation (KFF) report found that smokers paid 12% higher monthly premiums than non-smokers.
Inflation and health care costs
Two additional factors that affect premiums are increases in inflation and health care costs. As the overall cost of health care rises, the insurance to cover the costs must also increase.
McBrayer said that premium increases average about 6% to 10% a year. Since plans costs vary based on the insurance company, outlier cost ranges can occur. He said that Blue Cross Blue Shield recently experienced a larger than average increase ranging between 11-12%. The company-specific premium changes are an outcome of company costs and the loss ratio, which is the percentage of premiums that an insurance company collects that is returned to policyholders in the form of health benefits.
“The cost of insurance is a function for how well the company is doing with their loss ratio,” McBrayer said.
On a national scale, Medigap premiums have risen more moderately. According to the KFF report, the national average premium increased 13% between 2007 and 2010. That’s an average annual increase of about 4.1%.
Many of McBrayer’s clients are not surprised by the premiums, partly because Medigap yearly increases are significantly lower than premium increases for individual insurance plans. Leading up to their 65th birthday, he said some people experience yearly premium increases of 20%-25% when enrolled in an individual insurance plan.
When the smaller price hikes occur for Medicare Supplement, it’s less of a surprise. “People understand that rates are going to go up,” McBrayer said.
Gay believes that increased premiums are partially due to the moderate coverage provided by Original Medicare. When Medicare provides limited coverage of a health care service, supplemental plans will be forced to pay the difference and increase premium costs. But he predicts that the yearly shifts will be minimal due to the slow evolution of the federal program. Besides the sweeping modernization in 2010, few additional changes have occurred in the Medicare Supplement insurance sector.
“Everything in Medicare and this industry is slow to change,” Gay said. “I think companies are slow to react as well.”
He said that the yearly increases will be small and manageable for most.
“The price increases are not going to be so dramatic to price them out of their plan,” Gay said.