PPACA Helps Drive Medicare Trends Down - Is This Good News for Medigap?
Medicare Supplement, also known as Medigap, is exempt from the regulations established by the Patient Protection and Affordable Care Act (PPACA). However, PPACA does include reforms to the Medicare payment system that have helped reduce claim trends for Medicare - and therefore Medigap - to their lowest recorded levels ever. While this is good news at face value, it may be worth taking a closer look at what this means to an insurer’s Medigap profitability.
Claim cost trends for Medigap have fluctuated over the years. Many Medigap benefits were richer before standardization. Inflation in the 1970s and early 1980s contributed greatly to pushing trends even higher, reaching 15% on average during that period.
Additionally, there was no cost control until 1984 with the Inpatient Prospective Payment system (IPP). The Balanced Budget Act (BBA) added controls for stemming fraud and abuse. Overall medical inflation was very low at this time as well; however, inflation returned to normal levels for the next few years, until increases in physician costs and utilization pushed trends even higher in the mid-2000s.
After these increases in physician costs, the cost trend stayed at more normal levels of 4% – 5%, without aging, until PPACA controls pushed trends to the lowest recorded levels, going below 2% on average.
The chart below shows Medigap claim cost trends over the years and key government programs that have influenced Medigap. Approximately 20% of Medigap claim costs come from Part A hospital costs. The remaining 80% are the physician costs.
As you can see, the overall Medigap claim trends have never been lower than they are currently. This sounds like a very good thing, right? Not necessarily. And that is where things get complicated.
Five Year Average Medigap Trends & Key Legislation
Medigap is a business for which rate increases are expected annually to account for medical cost trends. Carrier rate increases are driven by the company’s experience and of course the market claim trends. Lower claim trends usually mean lower rate increases. As much as rate increases are primarily set to reach target loss ratios, if a carrier can get to target loss ratios with lower increases, it is actually reducing premium revenue, not just currently, but for the future of the product. There are persistency advantages to lower rate increases, and modelling should be done to see how a company’s bottom line actually fares.
Another thing to consider is that generally commissions are not paid on rate increases, so lower rate increases actually create a higher average commission rate as a percentage of premium over time.
Finally, since persistency is better, fewer Medigap insureds are looking to switch carriers. This could mean fewer opportunities for sales from individuals replacing their current plans. Insureds who switch their coverage from one Medigap company to another have to be underwritten (unless prohibited by the states). Therefore, a larger percentage of all sales from new buyers just turning age 65 or those switching from Medicare Advantage to Medigap coverage are guaranteed issued. This could lead to higher loss ratios than originally anticipated in pricing.
So, while lower claim cost trends are good for seniors overall, the impact to a carrier’s Medigap profitability is considerably more complex.