Medicare Supplement and the Market Opportunity
Wouldn't it be nice to be in a business selling an insurance product where your potential customer base is going to increase by 10,000 people a day1, on average, for the next 16 years? Well, this market exists today, and it is called Medicare Supplement Insurance, or Medigap, or even Med Supp.
In order to fully comprehend the value and opportunity that Medicare Supplement presents, you first need to understand the current Medicare system and the choices that individuals are provided with when they turn age 65. This article will give you an overview of current Medicare options and how a Medicare Supplement policy can provide additional benefits to those who enroll in "Original Medicare."
Everyone has heard of Medicare, which is the government-run healthcare plan that is made available to most people age 65 and older, people under 65 with certain disabilities, and people with end-stage renal disease. When an individual becomes eligible for Medicare, he or she is given two options on how to receive coverage. Most people are probably familiar with the traditional Medicare offering which is also referred to as “Original Medicare.” This plan is made up of Part A and Part B. Part A covers inpatient hospital care and some expenses for skilled nursing facilities and is provided to people at no charge, assuming they have paid Medicare taxes while working. Part B covers doctors' and other healthcare providers' services, outpatient care and preventative services. There is a premium for Part B that ranges from $104.90 up to $335.70 per month and is based on an individual's prior two years of income.
The other option individuals are given is to purchase a Medicare Advantage plan, or Part C. A Medicare Advantage plan is technically still Medicare, but the plans are run by private insurers and may be similar to an HMO or PPO plan. Since private insurers manage these plans, the plans vary and have no standardization. In addition, premiums for a Medicare Advantage plan can be similar to Original Medicare Part B or they can be substantially higher, depending on the benefits that are offered. For the purpose of this article, all you need to know about Medicare Advantage is that it is available as an option when someone becomes eligible for Medicare. If an individual chooses a Medicare Advantage plan over Original Medicare, he or she is not eligible for a Medicare Supplement policy.
The final piece of Medicare is Part D, Prescription Drug Coverage. With original Medicare, Part D is not included but may be purchased for an additional monthly premium. If you purchase a Medicare Advantage plan, the prescription drug coverage may or may not be included. If Part D is not part of your plan you are able to purchase it separately.
Medicare Supplement Overview
If a person has chosen the Original Medicare option, he or she is also eligible to purchase a Medicare Supplement plan. Medicare Supplement, Medigap or Med Supp is private health insurance that supplements Original Medicare and helps an individual pay the coinsurance, copayments and/or deductibles not covered by Medicare. Medicare Supplement is regulated by the federal government through the Center for Medicaid and Medicare Services (CMS) and requires insurers to only sell standardized plans, which means they include the same benefits and features, regardless of the company a consumer purchases the coverage through.
Since the coverage is the same from carrier to carrier, cost is the main differentiator. Even though the coverage is standardized, there are 10 different plans from which to choose and that offer differing levels of coverage. This coverage ranges from the basics, Plan A, to covering almost all out of pocket expenses with first dollar coverage, Plan F, which is by far the most popular plan.
There are three ways an individual can apply for a Medicare Supplement policy. The first is during an open enrollment period that lasts for six months and starts the first day of the month in which the applicant is age 65 and enrolled in Original Medicare Part B. The advantage of applying during the open enrollment period is that applicants are not subject to medical underwriting and cannot receive an adverse underwriting decision because of a pre-existing condition. If an individual applies for Medicare Supplement insurance after the open enrollment period concludes, the insurance carrier to whom he or she is applying can medically underwrite the individual and possibly decline the person for coverage.
In a third enrollment scenario, an individual would be eligible for guaranteed issue, even though he or she is outside of the open enrollment period. This involves moving from a Medicare Advantage plan to a Medicare Supplement plan within a defined period or coming off other, non-Medicare health insurance.
Value of Medicare Supplement
As you can see, Medicare Supplement coverage brings significant value to the policyholder. Beyond the obvious direct financial benefits, it allows seniors to budget better for medical costs and avoids the confusion and difficulty of handling complex medical bills. This is especially important for seniors who are on a fixed budget.
As you can imagine, when you have a product that is valued by the consumer, and its consumer base is growing daily by an average of 10,000 people,1 a product such as Medicare Supplement is sure to gain a lot of attention from the insurance market. It's hard to miss the advertisements, both on television and in print from AARP (UnitedHealthcare) or Humana—two of the largest carriers selling Medicare Supplement today. However, there are actually 285 carriers currently in the market, with 175 of these carriers selling new business. Throughout 2014, a minimum of 10 new carriers are poised to enter the market and with many more considering entrance.2
As popular as this plan is with consumers, and despite the positive, long-range demographic conditions, some concerns and questions are being raised in Washington. We are living in a time where big government programs are being questioned and people are searching for ways to cut the budget as well as raise new revenues. Even though Medicare Supplement is not a government-funded program, some believe that certain Medicare Supplement plans are too rich and the first dollar coverage is inflating the utilization rate of Original Medicare.
In September 2013 the Government Accountability Office (GAO) delivered a report to the Senate outlining its findings on utilization rates of Original Medicare and showing rates both with and without a Medicare Supplement policy in place. In this study, the utilization was significantly higher when a Medicare Supplement policy was in place. These findings, along with other studies, have led to a number of recommendations from legislators in Washington. Some of the most popular are the elimination of first-dollar coverage, introducing cost sharing and taxing Medicare Supplement premiums. The White House has actually taken this one step further in the President's 2015 budget and included a surcharge on Part B premiums for those that purchase near first-dollar Medicare Supplement coverage.
As mentioned previously, the number of people age 65 and older will to continue to grow and expand the market for Medicare and Medicare-related products. In 2012 there were 10.5 million people with Medicare Supplement policies. That number is expected to grow to 13 million in 2017 and 16.6 million in 2022.3 With that level of projected growth and the profitability the product is currently showing, Medicare Supplement should continue to attract new carriers. It seems that the size of the market will support additional carriers; however, when price is the major differentiator, turning Medicare Supplement into a commodity product—and managing to the lowest price in the market—would not be beneficial in the long-term and could negatively impact carriers as well as consumers.
As a leader in the Medicare Supplement reinsurance market, Gen Re is committed to this business. We plan to build on our successes with new and improved capabilities that address the reinsurance needs of carriers in the Medicare Supplement market today and those planning to enter the market in the future.
For more articles in this publication, view the Table of Contents.
1 “Baby Boomers Retire,” Pew Research Center, Dec. 29, 2010.
2, 3 The Future of Medicare Supplement, 3rd Annual Market Projection, CSG Actuarial.