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.


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.

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