Today, we’re going to uncover the #1 danger when choosing a Supplemental plan. We’ll give you information on why some people fall prey to this danger and teach you how to avoid it. Let’s get started. 

The #1 Danger When Choosing a Supplemental Plan

Some people think that the number one danger they face when choosing a Supplemental plan is whether the company they go with will still be around 5, 10, or 20 years down the road. The truth is, that all national carriers have been in business for a minimum of 50 years, some even 150 years. So you don’t need to worry about the carrier still being in business. There’s a very good chance they will be. 

The real danger when choosing a Supplemental plan is this: The stability (or instability) of the company’s rates. In other words, what will your rates look like 5 or 10 years down the road?

Supplemental Plan Coverage is Standardized

There are 10 different types of Supplemental plans on the market today, all represented by different letters. Many people have a Plan G. Let’s say you bought a Plan G from XYZ insurance company and your friend bought a Plan G from ABC insurance company. Thanks to the fact that Medicare standardizes coverage, you and your friend’s coverage will be the same, regardless of the companies you purchased the plan through. 

However, when it comes to rate stability, you and your friend could have very different experiences based on the carriers you signed with. 

Supplemental Plan Rates Can Change

Anytime you buy a Supplemental plan, you're going into a group. The group is made up of other policyholders just like you who bought policies similar to yours around the same period. 

The Initial Rate

When you first buy your Supplemental plan (and enter the group), you’ll be given an initial rate. Your initial rate is set based on one of three different categories. Some people’s rates are set based on a community rating. This means that everybody in the group will initially be given the same price regardless of their age or gender. Very few carriers offer community rates. 

The second and most common initial rate category is determined by something called the attained age, and the third category determining the initial rate is called the issue age. 

If you enter an attained age or issue age policy, the carrier sets a variety of rates based upon several different factors like age, gender, and tobacco status. So the carrier will look at your age, gender, and tobacco status, and will set your initial rate based on these factors. 

Let's suppose a 65-year-old, non-tobacco-using female enters a Supplemental policy Plan G at an attained age or issue age initial rate. For simplicity’s sake, let’s say her initial rate is $100 a month. Now let’s say a 67-year-old tobacco-using male enters the same policy. His rates will be higher than the non-tobacco-using 65-year-old female, probably coming in at around $120 a month. 

This is how your initial rate is calculated on a Supplemental plan. However, your rates will not stay the same, so the initial rate is not the most important thing to worry about. Let’s look now at how your rates will increase. 

Rate Increases

Rate increases will vary based on how your carrier determines your initial rate. For example, if you are in the attained age block (most states use the attained age block to determine initial rates), then you can expect to see annual increases to your initial rate. Essentially, as you get older, your policy rates will go up. Thankfully, this annual increase is usually not very much, often being about a $40 to $50 increase per year (or around $4 a month). 

One of the reasons most insurance commissioners throughout the country like attained age is because of the reality of medical inflation. Every year, medical services get a little more expensive, so the insurance company needs a little more money from you to help cover the cost of inflation. By slightly raising every group member’s rate each year, they are better able to offset inflationary medical increases. 

The second way you can experience rate increases is when the whole group rate goes up. If you purchased an issue age policy, your initial rate was determined by your age (at the time when you got the policy), your gender, and your tobacco status. Issue age initial rates are typically a little higher than attained age rates simply because the issue age policy cannot raise your rate every year as you get older. Instead, they can only raise the rate of the whole group. 

Similar to the issue age rate increases, community rate policies can only raise rates for the entire group, they are not allowed to increase your rates every year when you get older. 

How Do Group Rate Increases Occur?

Let's go back to our earlier example. A 65-year-old non-tobacco-using female is in an issue age policy. Every month she pays $120 of premium into the group. So every month she (and countless other policyholders in the group) are putting money into the group by paying premiums. 

But money isn’t just going into the group. It’s also being taken out. Why? All the policyholders have transferred the risk of their health insurance claims to the carrier. So whenever someone in the group files a claim, the insurance provider dips into the group money (thanks to those monthly premiums) and pays money out to cover the claims. They pay hospitals, doctors, MRIs, and a whole host of other bills for the policyholders in the group. 

No matter what type of plan you’re in (community rate, issue age, or attained age) eventually, more money is going to be going out than money coming in. No doubt about it, this will eventually happen. When it does, the insurance carrier will raise the group rates. The question you have to ask is, when will it happen? And how often is it going to happen?

While you can’t ever know for sure when the group rate is going to increase (because of more money going out than coming in), you can determine which carriers are less likely to experience frequent group increases. How can you determine this? It’s simple. The larger the group, the more stable the rates should be. Why? More policyholders in the group mean the risk of claims is spread out to more people. 

Think about it, if you’re in a small group of 1,000 people and 50 people need hip or knee replacement surgery, that affects the group much more directly than if you are in a group of 10,000 people and 50 people need hip or knee replacement surgery. With fewer premiums coming in and fewer policyholders to spread out the risk, smaller groups often experience rate increases much more often than larger groups. 

All of this is not to say that small groups won't be stable. If you’re in a small group of primarily healthy people, it will be stable, despite its size. But if you’re in a small group with lots of cancer or other health issues, your rates will most likely rise more frequently. And since you can’t know the overall health of the group you're entering, it’s always safer to get in a larger group. 

Conclusion

The number one danger when choosing a Supplemental plan is the stability (or instability) of the rates. If you purchase a Supplemental plan, you will experience rate increases. This can’t be avoided. But the question you have to answer is how much will the increases be, and how often will they occur? When trying to determine the group’s rate stability, look at things like the type of group you’re entering and the size of the group. Ultimately, you want to be in a plan with very moderate and infrequent rate increases. 

We understand how difficult making the right Medicare decisions can be. To take the next step, watch our full course here, or schedule a free one-on-one call with a certified Medicare School Guide who can answer your questions, compare plan options, and even help you enroll. Click here to get started.

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