Variation and Trends in Medigap Premiums. Conclusions and Implications

12/16/2011

We find that Medigap premiums have risen moderately on average over the past decade and in particular since 2007. From 2001 to 2010 Medigap premiums increased at an average annual rate of 3.8 percent, while Medicare spending per beneficiary increased by 5.4 percent. In six of the past nine years, Medigap premium increases have been smaller than the average increases in Medicare spending per beneficiary.

The Medigap market has been contracting over the past decade, declining from approximately 26 percent of beneficiaries in 2001 to approximately 20 percent in 2010. The decline in the Medigap market is associated with the increasing attractiveness of MA plans. Following the expansion of MA that resulted in large part from the payment increases legislated in the 2003 Medicare Modernization Act, enrollment in MA has grown from 14 percent of beneficiaries in 2001 to 25 percent of beneficiaries in 2010.

There is large variation across states and across plan types in monthly Medigap premiums. This variation in monthly Medigap premiums across states largely reflects state variation in Medicare spending per capita. This variation may also reflect unmeasured differences in the risk profile of enrollees. Other factors that explain variation in premiums among plans include whether it is an old or new plan and whether premiums are rated based on attained age or age at issue.

Variation in premium increases, as opposed to premium levels, is explained by similar factors. As would be expected, the trend in Medicare spending per beneficiary by state is a significant predictor of Medigap premium changes. In addition, increased Medicare Advantage penetration is associated with smaller increases in monthly Medigap premiums. That is the availability of attractive MA options as a direct competitor to Medigap holds down premium increases.

Despite the moderate Medigap premium increases on average, some policies experienced increases that were significantly larger. These policies tended to be newer policies and policies undergoing large changes in covered lives. Further research is needed to examine the underlying reasons for such changes.

One implication of these finding is that significant premium increases that cause concerns for both beneficiaries and policymakers are associated with a minority of Medigap policies. The Affordable Care Act authorized a rate review program for comprehensive health insurance that focuses on potentially unjustified premium increases. Under current law, this program does not include rate review for Medigap policies. Encouraging states to expand their programs to examine large increases in Medigap premiums may be an option to increase the value of policies to enrollees.

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