Medicare Supplement Claim and Rate Trends – and Their Impact on Profitability
Medicare Supplement claim costs are on the rise.
Gen Re observed 2018 year-over-year claim cost trends of approximately 8% for recently issued Medicare Supplement business (that is, business written within the last 8–10 years). For older business, that trend is around 5%. Both numbers are up approximately 3 points over what was observed in 2017.
Gen Re measures Medicare Supplement claim cost trend as the year-over-year change in claim costs on the same lives, after removing the impacts of aging and underwriting wear off. Implicitly, this number includes the impact of the increase in medical costs, as well as the impact of changes in utilization, cost shifting between Medicare and Medicare Supplement, etc. It is an all-inclusive definition that is intended to reflect the true underlying change in costs for the Medicare Supplement product, year over year.
The 2018 Medicare Trustees Report showed a significant increase in Part B claim costs per capita in 2018 over 2017. The period 2015–2019 is shown below for both the 2017 and 2018 reports.
Note that the 5.9% number in the 2018 report is a reasonable average of our 8% on new business – and 5% on older business – that we have observed in the 2018 experience.
Increase in Part B Claim Costs
Several causes of this increase are likely, and Gen Re will continue to study the causes over the first half of 2019. One culprit is surely the shift from inpatient hospital to outpatient status for more and more healthcare services. This trend has been occurring for the last few years and has continued in 2018. While this shift is presumably a cost savings to the healthcare system as a whole, it often produces a cost shift from Medicare claim payments to Medicare Supplement.
Generally, that shift works as follows: For an inpatient hospital stay, Medicare Supplement will cover the Part A deductible for the stay ($1,340 in 2018) and virtually all other costs incurred would be paid by Medicare. If that same procedure is performed as outpatient status, the costs incurred fall under Part B, and Medicare Supplement is responsible for 20% of those claim costs.
Increases in claim cost trends put pressure on the profitability of Medicare Supplement insurers. You generally need to observe the trend shift – and ensuing increase in loss ratio in your experience – before you are able to obtain the necessary rate increases to offset the increase in cost. This built-in lag negatively impacts profitability.
This claim cost challenge comes at a time when the industry as a whole is under incredible competitive rate pressure. The market has been flooded with new entrants over the last several years who are vying to enter the market with very sellable rates. As a result, premium rates have been decreasing. And not just versus claim trend, but in absolute terms as well.
The following table shows the average monthly rates (population weighted by zip code) for a sampling of 10 states (Plan G, Female, Age 70). Rates are shown for the companies ranked 1st, 10th and 20th competitively within that state at the given time.
Rates for the company ranked #1 (the lowest rate) as of December 2018 vary from 1.7% higher to 8.0% lower than the rates for the company ranked #1 as of December 2015, with 8 of the 10 states having a decrease. The straight average across the 10 states is a 3.3% decrease. For rank #10, all states saw a decrease, ranging from 5% to over 13%. The straight average is a 9.2% decrease. For rank #20, the decreases range from 13% to 43%, with an average of 26%.
The previous chart illustrates not just the absolute change in rates in the market, but also the rate compression that we have been observing for some time in the market now. Graphically, rate compression looks something like this:
Obviously, based on companies ranked 20th over time, we can’t say that market rates have decreased by 26%. But based on Chart 2, we can say the rates consumers are paying have decreased in real terms over the last three years.
Claim Costs vs. Rate Trend
Looking at the claim cost trend and premium rate trend together with some rough, hypothetical math, we can see an implied loss ratio, then and now. Since Part B coverage is such a large part of Medicare Supplement coverage, we can use the Trustees Report Part B trend numbers as a good proxy for our total Medicare Supplement claim cost trend for the period 2016–2018. (As discussed earlier, this probably understates trend on new business.) That makes our increase in claim cost over that period:
1.021 x 1.038 x 1.059 – 1 = 0.122
With this as our basis, we estimate that claim costs per person have increased by roughly 12% over the last three years.
For premium, let’s use the average of our rank #1 and rank #10 rate decreases, dismissing the rate decrease of companies ranked #20 as being purely indicative of market rate compression. We’ll average two averages: Our rank #1 average decrease of 3.3% with our rank #10 average decrease of 9.2%. We’ll call this new average, which equals 6.3%, the average decrease in rates for companies that are ranked in the top 10 over time.
This means we’ve got claim costs increasing by 12%, and premiums dropping by 6%. (Spoiler alert: This isn’t going to be good for our loss ratio.)
To complete our hypothetical example, if rates at the end of 2015 produced a 70% loss ratio, the rates produced by our claim costs and premium rates at the end of 2018 will produce a loss ratio of 84%. (I told you it wouldn’t be good.)
Impact on Insurers
According to the 2018 Trustees Report, 2019 trend will drop slightly from 2018 levels but will be still be 5%. Remembering also that new business has been averaging a couple points above this, it looks like the claim cost pressure won’t be subsiding anytime soon.
The good news is that, as an industry, we observe these claim cost impacts immediately and can react fairly quickly with rate actions. This is much different than some products – for example, Long Term Care or Individual Disability – where claim trends can manifest many years after rates are set and produce nightmare-inducing loss ratios with limited ability to repair the damage.
It will be interesting to see how the market responds to all these pressures in 2019 and beyond. Market reactions, like claim trend itself, are notoriously difficult to predict. But one thing you can be sure of – Gen Re will monitor the market closely, as always.