Varying Costs for ‘Medigap’ Coverage Make Shopping Around a Must

Back in 1990, when it directed the insurance industry to standardize the types of policies that could be sold as “Medigap” insurance, Congress figured that would help older people shop for the right policy at the right price.

The industry and state regulators came up with a set of categories for policies, ranging from basic to extensive coverage, and specified what a policy in a given category had to pay for. Thus, a consumer should be able to make an apples-to-apples comparison: If Company X’s policy is cheaper than Company Y’s in a given category, it should be the better deal.

Unfortunately, it hasn’t worked out that way.

While Medigap standardization has in fact done much to drive off the market many of the truly horrible policies that were once foisted on seniors, there remains plenty of room for variation in prices.

“The benefits are standardized, but the premiums [are] not at all standardized. They can vary by over 100%” for the same coverage, said Priscilla S. Itscoitz of the United Seniors Health Cooperative in Washington. “You really have to shop around.”

The variations were underlined in a survey done by Weiss Ratings Inc., a Florida firm that specializes in rating insurance companies.

Weiss Ratings found enormous variations among states and among carriers within states. For example, a 65-year-old man could pay as little as $241.80 a year for a basic Plan A policy if he lived in Texas, Weiss Ratings found, or as much as $1,812.28 if he lived in Florida.

Nationally, the cheapest top-of-the-line Plan J policy was available in South Dakota for $1,126.20, while the most expensive was in Florida for $3,985.

Prices “vary all over the lot,” said Martin Weiss, the firm’s head. “That shouldn’t be.”

Weiss said that in his view, “the consequence of Congress’ acting to standardize the benefits should have been a narrowing in these price quotes. That has not happened. The reason, I believe, is that consumers haven’t gotten the information or they have no way of accessing the information efficiently, so the marketplace is not working the way it should be.”

Partly for this reason, Medigap policies will be on the agenda as Congress and the president form a committee next year to review and suggest an overhaul for the entire Medicare system.

The reasons for the wide Medigap price variation are complex, and not all involve insurance company marketing.

For example, there are wide geographic variations in medical practices and costs across the country. “People are treated differently in different places. In one place you’d get drugs and in another you’d get a hysterectomy for the same condition,” said Cheryl Matheis of the American Assn. of Retired Persons.

Also, doctors and hospitals in some areas charge higher prices than in others.

Then, too, in some parts of the country people seem to live healthier lifestyles, which reduces costs, noted Richard Coorsh of the Health Insurance Assn. of America, a trade group.

But insurance company practices do play a role, and it’s one that consumers should be aware of. Perhaps the most important of these is the system a given carrier uses to “rate”--or assess the risk of--the population it serves.

There are three basic systems:

* Community rating. In this system, the risk, and thus the cost for the insurer, is based on the experience of the community as a whole--a sort of overall average. Older and sicker people are lumped in with younger and healthier ones. Thus the worse risks pay lower premiums than they would if they were evaluated on their own, while better risks pay more. “This is traditional insurance” practice, where the risk is spread across the whole community, Matheis said.

* Attained age. In this system, individuals are rated, and their coverage prices are based on their age: Younger people pay lower premiums and older people higher ones. “With attained age, the price of the product will go up every year,” Matheis said.

* Issue age. A sort of compromise between community rating and attained age, this system bases the price on the age at which the consumer buys the policy. The price generally will be higher for a relatively young person than under the attained-age system, but the premium does not rise because of increasing age.

In addition, some carriers have “open enrollment” periods each year in which they will take all comers, while others require medical checks--”medical underwriting,” in industry jargon-- and might reject those who do not pass.

(All carriers are required to take all comers during the first six months of Medicare eligibility, but after that window they can impose restrictions. Also note that carriers can impose a waiting period for benefits even though they agree to cover you.)

These practices cause wide variation in premiums and can affect future premium levels. Consumers should know this when pricing policies, and understand what an insurer does before signing up.

A policy that was cheap for a 65-year-old can become quite expensive when that person reaches 80 if the carrier uses the attained-age system. Conversely, a community-rated policy may be expensive at age 65, average at 75 and cheap at 80. “Smart insurance purchasers need to understand the differences,” Matheis said.

Experts recommend that people approaching Medicare eligibility begin educating themselves both on Medicare itself (a government program) and on Medicare supplemental, or Medigap, insurance (which is private).

On Medigap, consider:

* Do you need a policy at all? Some employers allow retirees to continue in the company insurance plan, which can function as a Medigap policy. But many firms are eliminating this coverage or sharply boosting the cost to retirees. If you don’t have retiree coverage or if you doubt your company will continue it, you probably need a Medigap policy.

“Medicare was never meant to be total health-care coverage, and it isn’t,” Itscoitz said, so unless you can afford to pay the other things out of your pocket, private insurance is highly advisable.

* If you buy, which plan do you want? HMOs, popular in the West, provide comprehensive care so no Medigap policy is needed and costs are lower. They often provide prescription drug coverage, which Medicare does not. But congressional action may threaten some aspects of HMO coverage as they overhaul the program.

Medigap plans are labeled A through J, with later letters providing more coverage. Plan A provides basic benefits, including hospital co-payments for stays longer than 60 days but not more than 150 days, plus 100% of as many as 365 additional days during the course of your life; co-payments for physician services, and three pints of blood a year.

All other plans include those benefits and layer on additional ones, including paying hospital deductibles, foreign travel emergency treatment, home-care visits and the like.

Consumers should look over the benefits of each plan carefully and see which they are likely to need.

* Choosing the insurer. Price, of course, is a priority, but this could be a long-term relationship, so try also to look for a company that is financially sound. Weiss Ratings rates companies, as do other companies such as A.M. Best & Co. and Standard & Poor’s Corp. So do states and private groups, such as United Seniors. Ask your agent or any company you’re considering for a history of premium increases as well.