Medigap and the One-Way-Street Problem

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If a 65-year-old signs up for a Medigap policy but decides a year or two later that the premiums are too high, the new retiree can easily switch to an Advantage policy with a low premium. But if, after starting retirement with Advantage, he wants to switch to a more flexible Medigap policy, he could run into problems.

A federal rule requires insurance companies that sell Medigap to accept all 65-year-olds – but only when they are new to Medicare. No rejecting new retirees for pre-existing conditions. No charging a higher premium because they are sicker. But once that initial period lapses, Medigap insurers can reject applicants for all kinds of health reasons.

This one-way street “detracts from the ability of this market to serve beneficiaries well,” researchers from the University of Southern California (USC) concluded in Health Affairs.

Advantage plans are very appealing to new retirees. In addition to low or even no premiums, they usually offer extra services like dental and vision care. But the difficulty of migrating from Advantage to Medigap is increasingly an issue.

Retirees on Advantage plans aren’t always rejected by a Medigap insurer. However, as the Advantage plan market share swells to more than half of all retirees, more people are putting themselves at risk of bumping up against Medigap’s stricter underwriting procedures if they want to switch.

These situations can arise when, say, a retiree with a serious health condition wants a Medigap policy because it has fewer restrictions on specialists, hospitals and cancer centers than Advantage plan networks do. Advantage plans also require prior approval of medical treatments and drugs, and they reject about 6 percent of such requests from physicians.

A retiree who is diagnosed with a serious illness might “finally understand some of what they give up in Medicare Advantage,” Ginsburg said. Choosing an Advantage plan, “is almost like a de facto lock-in for some people.”  

Even if a Medigap insurer does agree to cover a baby boomer who started retirement with an Advantage plan, Garrett Ball, an independent insurance broker, said switching late has a downside. “You can also be required to pay more based on your pre-existing conditions,” he said.

There are a couple exceptions to the restrictions imposed on moving from Advantage to Medigap. If a new retiree initially tries an Advantage plan and changes his mind, he still has the right to buy a Medigap plan within the first year of initially signing up for Medicare. And lucky retirees in four states with a so-called guaranteed issue policy – Connecticut, Maine, Massachusetts, and New York – are free to switch back and forth between the two types of plans. However, the Medigap premiums in these states are higher than in other states.

When a retiree with an Advantage plans is rejected by a Medigap insurer, he has one other option. He can switch to basic Medicare – Part A and B – which he would probably supplement with a drug plan. But the researchers argue in Health Affairs that this is impractical because basic Medicare has no catastrophic coverage, potentially exposing patients to enormous medical bills in a health crisis. Advantage plans cap total out-of-pocket spending. The current cap is $8,850 per year.

One difference in how the federal government funds Medicare provides an avenue for making the system more balanced so that it works better for retirees.

Medicare currently pays Advantage plan insurers 122 percent of what the program would have spent if their policyholders had traditional Medicare. The USC researchers propose that Congress reduce these overpayments and use the money to “enhance[e] the traditional Medicare benefit by adding catastrophic protection.” The effect on Advantage plans would be to increase their premiums, eliminate some of their extra services, or cut into insurers’ profits.

But the goal, the researchers said, would be to make Medigap less necessary or its premiums more affordable – and accessible to more people.

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Ken Pidcock

People initially purchase Medigap coverage because they are willing and able to pay for it. I wonder if it would help if more of the people who are able to pay for it were willing to pay for it. The larger risk pool might make it easier to take on people hoping to switch from Advantage plans.

Melinda Caughill

Medigap policies can be obtained any time, any age in the states of NY, CT, and MA. So, we can look to these states as examples of what would happen if other states adopted similar lax measures. In NY, the lowest priced Medigap policy plan G is about $320/month. Compare that with AZ or CA where you can get a Medigap policy Plan G at age 65-67 for about $110/month. Freedom from medical underwriting is NOT free.
I believe the best solution is for retirees to make good decisions at age 65 — decisions not influenced by sales agents paid about 40% higher commissions on the initial sale to sell Medicare Advantage than Medigap policies. Making the situation even worse is that, over the life of the client, Medigap policies will pay renewals for only 6 years while Medicare Advantage policies never stop paying renewals. Do the math. That’s about $2,000 in commissions over 20 years for a Medigap policy, but over $6,000 for a Medicare Advantage sale. You tell me what I’d prefer to sell you as a Medicare sales agent?*
*I’m not claiming all insurance agents are bad. Instead I’m claiming that this business model leads biases the sales process, leading retirees to choose a plan that is not necessarily in their best interest.

    Lynda Young

    I agree with you. Educate and caution new to Medicare beneficiaries of the dangers, risks and compromise they are taking before enrollment. As a SHIP counselor that is what we do. I would rather see a higher cost for beneficiaries with pre-existing conditions. That is the way most insurance plans work. If they saved for 5, 6, 7 years in MA then they would pay for it rather than have year round guarantee issue that raises the cost to every Medigap plan holder (some of whom are barely making it but have the security of pre-paying their catastrophic illness or injury.
    The other issue is that employer covered retiree plans mostly only offer an company-sponsored MA plan which you could lose if you dropped it for Medicare. Those retirees are stuck, especially if they receive a stipend helping them pay for their care or insurance.


In addition to the four states you name, at least seven states have a Medigap birthday rule: California, Idaho, Illinois, Nevada, Louisiana, Maryland, and Oregon. The birthday rule allows policyholders to change their Medigap plan within 60–63 days of their birthday to a plan with the same or less benefits without answering health questions.

Lee A Kamps

Until the 1990s, there wasn’t anything resembling Medicare Advantage plans. The early MA “look alike” plans seemed too good to be true. In 1997, when Congress cut some funding for those plans, they disappeared in many markets. The explosion of Medicare Advantage plans started when congress passed the Medicare Modernization Act in 2003 that included outpatient prescription drug coverage. The old program of Medicare HMOs was re-branded as Medicare Advantage and included prescription drug coverage beginning in 2006.

I started selling Medicare supplement plans in the late 1980s when I left a big captive company where I had worked for nine years and they didn’t have any Medicare supplement plans. For the most part, they were a plan for the more affluent, while those who were covered through their employer group insurance and retired usually were continued on the plan after Medicare eligibility as a “Medicare carve out.”

However I noticed that during the 2000s, many companies were no longer covering retirees on their group health insurance plans. This created a marketing opportunity for Medigap policies. Since 2006, there has been an explosion of Medicare Advantage plans across the country. But MA plans are concentrated in the urban areas and what is available in rural communities are usually regional PPO plans or plans that lack the extra benefits of the plans in the urban counties.

This difference can be stark just in neighboring counties. I have a friend who operates a bed and breakfast in Key West, Florida, and he asked me about his Medicare plan. He has a regional PPO that has a hefty premium compared to HMO plans and hefty copayments for out of network coverage. Although I am not licensed in Florida, I could give him some information that was available to anyone. That regional PPO was the only MA plan available in Monroe County, Florida. But in neighboring Miami-Dade County to the north, there was a wide range of HMO and PPO plans from many companies. For what he is paying for that PPO plan, he could have a Medigap plan with no networks and no copayments. But he was out of the guaranteed issue period. I suggested that he consult with a good independent agent in Key West about those options.

I have seen these differences in my home state of Ohio where when I venture out of the city and urban counties into the “country” the choices for MA plans dwindle to just a few. One reason why MAPD plans are so popular now besides the additional benefits is that the newer generation has gotten used to provider networks and HMO plans and MAPD plans closely resemble their old employer group health insurance plans. As an experienced independent agent who has been licensed since 1977, I operate on the best mantra, give the customer what they want and what is best for their needs. There are advantages and disadvantages for both MAPD plans and Medigap plans. I try to be as objective as I can and let the customer decide which is best for their needs and budget.

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