Issue Brief: Changing Financial Risks for Medigap Insurance, Part 2
By Kristi M. Bohn
Health Watch, March 2024
Part 1 of this article examined the health trends that have affected Medicare supplements (Medigap) and Medicare Advantage (MA) offerings in recent years. Here, we will look at how the two compare and the effects on consumer decisions.
Medigap Competition with Medicare Advantage
The Medicare Advantage share of the Medicare market has grown significantly over time, from 19% in 2007 to 50% in 2023.[1] This growth has cut into Medigap’s market share (though not overall enrollment counts), as coverage under both policy types is not permitted (an administrative check at enrollment ensures this). This market share impact is driven mainly by three factors: advantageous payment streams from the Centers for Medicare and Medicaid Services (CMS) to MA plans relative to the payment streams from MA plans to providers; quite a bit of advertising; and the MA plans’ ability to flexibly enhance coverage beyond the standardized Medicare coverage.
In terms of the last point, many states do not let Medigap insurers provide benefit coverage enhancements—such as dental, vision, hearing and wellness—that MA plans have the flexibility to offer. Even in states that allow Medigap plans to offer certain optional enhancements, some require that those enhancements be renewed annually throughout the enrollees’ lifetime on the plan. This lack of flexibility makes it difficult for a Medigap issuer to accept the administrative and financial risk of enhancing benefits. MA’s broad annual flexibility to include dental, vision, hearing and wellness coverage gives MA a major competitive advantage. However, recent studies hint that the actual financial and health value of these enhancements may be small and these enhancements may be at risk going forward due to new financial pressures on MA plans[2].
Individuals continuing to choose to supplement Medicare with Medigap generally do so in order to readily choose and change their providers; retain provider access flexibility when in different geographic locations throughout the year (snowbirds, for example); and cover their major health care needs without MA’s utilization reviews and the risk of prior authorizations denials.[3] According to one study, more than 35 million prior authorization requests were submitted to MA plans in 2021, with 6% initially denied, hinting at barriers and complexities as well as likely delays in receiving necessary care.[4]
Providers may also appreciate Medigap-covered patients over MA patients, as the Medicare fee schedule is often more advantageous than that of MA,[5] and there is little to no red tape surrounding prior authorization and concurrent/retrospective review. Recently, several providers have started campaigns to influence patients’ Medicare coverage decisions or decided not to take certain MA plans at all.[6] Given the greatly increasing degree of health care providers’ services that will shift to Medicare patients in the coming decade, and thus the importance that payments from traditional Medicare and MA plans have on providers’ finances, these campaigns will likely grow in the coming years. Unlike the typical case for health insurers, health care providers’ finances were typically negatively affected by the pandemic, and many of them are still in recovery mode.
Guarantee Issue: A Competitive Difference but an Emerging Political Risk
Across the country, MA plans have a consistent annual open enrollment period where Medicare enrollees can change carriers and plans without having to worry that an insurance company may not accept them due to their age or health status. Similar open enrollment consistency does not exist in the Medigap market. Two states, Connecticut and New York, provide Medicare enrollees with year-round Medigap guarantee issue rights. A handful of states have some annual open enrollment window where an enrollee may switch Medigap carriers (but perhaps not be able to switch plan choice). When available, these windows often do not align with MA’s open enrollment timing and are often not consistent within the state. For example, some are based on the enrollees’ birthdates (California, Idaho, Illinois, Nevada and Oregon); the policy anniversary (Missouri); a timing selected by the carrier (Maine); or a fixed period that is consistent for all Medigap carriers (Massachusetts and, recently, Minnesota).[7] In the remainder of states, Medigap tends to be a “sticky” product selection, because if seniors leave their Medigap carrier, there are no guarantees they can return to that carrier at a later date. Given that people tend to be less healthy as they age past 65, leaving a Medigap carrier is a very risky choice in most states.
Due to complaints from seniors to state legislators, there is a growing regulatory risk to Medigap insurers coming from the broadening of guarantee issue rights, which attempts to make the opportunities to change Medigap carriers similar to those that exist in the MA market. While consistency in attracting new enrollees offers growth opportunities to Medigap insurers and is in some ways always an election for a Medigap insurer willing to take all comers, this change comes with a lot of underwriting risk. Most insurers rely on the sticky nature of Medigap to help in understanding their claims risks, which helps to obtain state approval for Medigap rate increases. Upheaval of the eligibility rules comes with a high risk for unexpected losses. While MA plans have federal risk mitigation programs that help MA insurers deal with this particular underwriting risk (called risk adjustment), such protections do not exist in the Medigap market. Combined with other federal and state political risks, such as the potential for new benefit mandates or design requirements, political risk is certainly on the watch list for the Medigap industry.
Reinsurance for Medicare Plans
Reinsurers make excess-of-loss reinsurance available for Medigap plans, though such reinsurance is not commonly sought. The fundamental homogeneity of the Medigap population, the product’s tie-in to the traditional Medicare fee schedule and the supplementary nature of the coverage has made Medigap a relatively predictable coverage for insurers to offer.
In contrast, excess-of-loss reinsurance is commonly sought by MA plans, as MA insurers are at risk for traditional Medicare’s share of the cost, which has a much higher risk for hospitalization cost outliers, and further because MA payers are not required to directly reference Medicare’s fee schedule in their provider contracts. While this often implies in practice that MA plans are paying providers less than the traditional Medicare fee schedule would have paid on an overall basis, the disconnect from the Medicare fee schedule subjects MA providers to more risk for outlier claims.
That being said, material risks are emerging for Medigap insurers for which reinsurance could help, particularly including the high-cost specialty drugs[8] covered in Part B and the growing number and type of gene and cell therapies. Medigap insurers are also experiencing risk in obtaining necessary rate increases from state regulators over time. State regulators are particularly sensitive to the rate increases affecting this population, given that most Medigap enrollees are on a fixed income. Reinsurers often provide their customers with free or low-cost research and experience studies that often can help to demonstrate the relevance for the emerging risks and the need for rate increases. Some reinsurers also provide capital-motivated reinsurance, which can help relieve some of the capital strain that relatively rapid growth can place on insurers.
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Why Is Medigap “Homogeneous”? Medigap is relatively more homogenous than other health plan types due to the following:
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Some Final Thoughts
The Medigap, MA and Part D markets provide a great deal of choice—choices so numerous that they can create a lot of stress for consumers and providers alike. After a session at last year’s SOA Impact conference, one of the questions posed to the panel of health actuaries was, “Which type of Medicare plan (MA versus Medigap) would each of you choose, and why?” Our answers were surprising, but rather than me telling you why, I suggest that you pose this question to your peers and let me know what you find out.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.
Kristi M. Bohn, FSA, MAAA, is vice president and lead actuary healthcare excess at U.S. Group Re, RGA. Kristi can be reached at kristi.bohn@rgare.com.