During the past few years in the U.S., performance, cost and risk trends for Medicare supplement (Medigap) products have undergone substantial changes. Some of these trends could ease cost pressures on Medigap insurers, while others might increase them. This paper discusses current changing trends and considerations impacting Medigap, as well as how Medigap compares to Medicare Advantage (MA) offerings and the plans' effects on consumer decisions.
Health Insurance Loss Ratio Experience (Loss Ratio = Claims/Premiums)
Sources: Jared Ortaliza, et al. “Health Insurer Financial Performance in 2021,”Kaiser Family Foundation, February 28, 2023 (KFF analysis of data from Mark Farrah Associates Health Coverage PortalTM); Medigap data from NAIC, “2022 Medicare Supplement Loss Ratios,” NAIC, 2023.
The pandemic affected health insurers, payers, and patients in unexpected ways. Counter to expectations in its early days, health insurance financial performance generally improved in 2020 and 2021 (Figure 1). Much of the improvement, however, was due to the number of patients who deferred certain types of care or simply sought less care than they normally would (or should) have.
Medigap markets experienced more pronounced financial improvements due to delayed and averted care in 2020 and 2021 than did other types of health insurance markets (see Figure 1). This was most likely driven by the larger impact deferred elective care had on seniors. This is ironic, as seniors who contracted COVID-19 were more likely to consult with their physicians and/or to require hospital stays (Table 1) in 2020 and 2021. However, two recent studies1 found that on average, Medigap enrollees have significantly more income than counterparts in other markets, including Medicare Advantage (MA). Thus, it is plausible that Medigap’s relatively better financial performance can be attributable to the enrollees’ better financial security, which correlates to better health in general as well as the increased ability to avoid COVID-19 exposure during the pandemic.
Source: Source: R. Dale Hall, Achilles Natsis and Patrick Wiese. “2022 Health Care Cost Model: Documentation of Inputs and Assumptions,” Society of Actuaries, November 2021, https://www.soa.org/globalassets/assets/files/resources/research-report/2021/health-care-cost-model-doc-guide.pdf.
To a small extent, year-to-year variations of Medigap’s financial performance are influenced by Medicare Part A’s substantial hospital deductible (Table 2), which is set annually by the federal government and which Medigap is designed to cover. Another possible driver in the relatively larger pandemic-related loss ratio drop is that other health insurance products’ reported financial performances would be affected by the need to provide more timely rebates to policyholders in comparison to Medigap plans, a situation that occurs when loss ratios are too low.2
The timing of and degree to which individuals returned to using healthcare services after the pandemic has been difficult to analyze and predict. Is there now an overall net lower “normal” use of services caused by some proportion of the population continuing to avoid physician visits and elective hospital care? Or is a fair degree of pent-up demand emerging that might cause a temporary net uptick in utilization?
Prior to the pandemic, Medigap loss ratios were relatively stable and predictable, ranging from about 77% to 81% (Figure 2). However, loss ratios ticked down substantially in the pandemic’s first year (2020) due to fewer claims, to slightly more than 72%. Although the average loss ratio did go back to 77% for 2021, Medigap insurers may have a tougher time justifying near-term rate increases to state regulators, given the significant reduction in overall claims they experienced in 2020 and 2021. Despite demographic and coverage differences, as well as the higher relative claims experience witnessed just prior to the pandemic (2019 was historically high for the loss ratio metric), these plans are likely to be at greater relative risk for misestimation of post-pandemic claims.
Individual and Group Medigap Loss Ratios 2009–2021 (Loss Ratio = Claims/Premiums)
Source: National Association of Insurance Commissioners. “NAIC Medicare Supplement Loss Ratio Reports,” NAIC, 2018–2021.
Adding to this is concern about what the future may hold in terms of potential hospitalization trends for COVID-19 and the effect long COVID might have on senior populations. Long COVID has thus far had a significant impact on individuals with circulatory and respiratory conditions, cancer, diabetes, and renal conditions – conditions that disproportionately affect those with Medicare coverage.3
For the past 50+ years, end-stage renal disease (ESRD) patients, no matter what their ages, have been able to enroll in traditional Medicare as long as they have met specific requirements. The 2016 21st Century Cures Act loosened the rules: starting in 2021, ESRD patients eligible for Medicare could opt instead to enroll in MA plans. Prior to 2021, ESRD patients could choose MA only if they had also been entitled to Medicare by being over age 65 or had been entitled through a permanent disability generally unrelated to ESRD.
The Centers for Medicare and Medicaid Services (CMS) has estimated that this rule change will increase the number of ESRD enrollees in MA by about 83,000 (63%) by 2026.4 A December 2021 study by Avalere estimated that the percentage of Medicare-eligible patients with ESRD choosing MA increased from 22.7% to 30.3% between 2020 and 2021.5
Medigap plans, particularly plans sold in states that mandated guaranteed issue to ESRD-entitled Medicare beneficiaries (dark blue states in Figure 3), had assumed a large degree of the 20% Part B coinsurance gap for ESRD patients for many years, particularly those patients without a retiree medical plan from their prior employer or those who do not qualify for Medicaid. Dialysis is consistently among one of the costliest treatments covered by Medigap plans, with annual coinsurance coverage often costing these plans more than $13,000 a year per ESRD patient, and costing the traditional Medicare program significantly more.
States Mandating Guaranteed Issue to ESRD-Entitled Medicare Beneficiaries (in dark blue)
Source: Caroline Li, “Health Meeting Session 106: ESRD Basics,” Society of Actuaries virtual meeting, June 8, 2020.
Medigap enrollment of ESRD patients is likely to be significantly affected by the MA policy change over time, although it may still take years for Medigap insurers to see material decreases to claims as they wait for MA plans to transition to their new higher level of share of the financial burden of ESRD costs.
Since the emergence of gene therapy as a treatment category, several gene therapies have been successfully developed and granted approval by the Food and Drug Administration (Table 3). Even more gene therapies are in the pipeline and will likely be approved in the near future.
These therapies typically cost millions of dollars per dose or course of treatment. Billing for these treatments has been under J-Codes thus far, and so they generally fall under Medicare Part B coverage.
As some gene therapies are specifically for children (e.g., Zolgensma, Skysona, Elevidys), Medicare, Medigap, and MA plans are not expected to experience the full cost impacts of these therapies. That said, many gene therapies are indicated for conditions for which persons under age 65 can enroll in Medicare through meeting its disability eligibility rules. These conditions include, but are not limited to, retinal dystrophy, spinal muscular atrophy, Duchenne’s muscular dystrophy, dystrophic epidermolysis bullosa, and sickle cell anemia. Thus, Medigap and MA insurers are and will be subject to some financial risk from people both over and under age 65.
Cell therapies, costing hundreds of thousands of dollars per person per year for the treatment of blood cancers, are also available. Expensive solid tumor cancer cell therapies are expected to be approved in the near future. All of these are bound to generate higher financial risks for Medigap and MA plans.
While manufacturers have yet to meet the high demand for cell therapies now available, they are working hard to find efficiencies that might make these solutions more widely available. Table 4 lists commercially available cell therapies as of February 2024. One of them, Lantidra, treats type 1 diabetes, while the rest treat certain blood cancers – including multiple myeloma, leukemia, and lymphoma – and melanoma. Manufacturers are also seeking to gain FDA approval for use of cell therapies for people with earlier-stage cancers.
Manufacturer prices for cell therapies are between $300,000 and $500,000 per treatment for Medicare enrollees. However, that is not the full extent of the financial risk to Medigap and MA plans. There are also significant hospital and physician charges associated with the delivery of these treatments. Total costs of cell therapies can typically range anywhere from $600,000 to $1.2 million, with higher costs experienced at more expensive facilities or when adverse patient safety events occur. Medigap would cover Part A’s deductible and up to 20% of the Part B coinsurance charges.
There are material emerging risks for Medigap insurers for which the use of reinsurance should be considered. These include high-cost specialty drugs covered in Part B and the growing number and type of gene and cell therapies.
The aging of the baby boom generation into Medicare eligibility, while a major program cost inflator for CMS and the U.S. health system overall, is also working out to be a short-term cost deflater for Medigap and MA, at least on a per-person basis. While this may at first seem counterintuitive, over time, the influx of boomers into Medicare’s ranks may yield reduced average claim numbers in the short term, due to a younger average age of enrollees. It will, however, likely have an opposite impact as this generation ages further.
That said, there are major state-by-state differences in how Medigap rates are allocated by age. These differences play a large role in how rates work in practice in any given state and for any given insurer. For example, Medigap insurers often make individual rate increase requests for specific pooled cohorts, such as groups pooled by the year in which the policies were sold or groups pooled by plan type. When mixed with differences in state oversight on rate requests for these cohorts, there can often be a wide range in Medigap rates, even within a given state.
Diving deeper into age-rating differences in Medigap, it is important to understand that most states are “attained-age-rated,” meaning that annual rate increases are affected both by health care cost inflation and enrollees being one year older.
Four states (Arizona, Florida, Georgia, and Idaho) are “issue-age-rated,” which means the age at initial issuance of the Medigap policy will drive the initial rate, and future rates will be driven mainly by common health inflation-driven rate increase requests from the insurer (but not the enrollee’s current age).
Medigap plans in eight states – Arkansas, Connecticut, Maine, Massachusetts, Minnesota, New York, Vermont, and Washington – as well as MA plans nationwide are community-rated (or “no-age-rated”). This means neither the insured’s age at issuance of the policy nor their current age affect the rate. Every purchaser pays the same fundamental rate for each product, although there can often be rate differences for variables such as smoker status and geographic locations. In community-rated plans, health inflation as well as a pool’s claims experience will affect whether enrollees in these plans have an annual rate increase, and if so, the amount of the increase.
Because average medical costs increase with age, the aging of baby boomers into Medicare eligibility has been particularly advantageous for community-rated and issue-age-rated Medigap plans. The average age of the Medicare population is decreasing as more and more baby boomers turn 65 and enroll in Medicare or MA. MA rate increases have also been relatively low compared to industry expectations over the last decade, at least partly due to this phenomenon. A December 2019 study by The Commonwealth Fund estimated that the influx of baby boomers into traditional Medicare (though not MA plans, which were excluded from the study) reduced the program’s health inflation by about 0.84% per year from 2007 through 2015.6 While policy experts and health economists often comment on this trend influence as small and immaterial, most health actuaries would disagree.
The Medicare Advantage share of the Medicare market has grown significantly over time, from 19% in 2007 to 50% in 2023.7 This growth has cut into Medigap’s market share (though not overall enrollment counts), as coverage under both policy types is not permitted (an administrative check at enrollment ensures this). This market share impact is driven mainly by three factors: advantageous payment streams from the Centers for Medicare and Medicaid Services (CMS) to MA plans relative to the payment streams from MA plans to providers; quite a bit of advertising; and the MA plans’ ability to flexibly enhance coverage beyond the standardized Medicare coverage.
In terms of the last point, many states do not let Medigap insurers provide benefit coverage enhancements – such as dental, vision, hearing, and wellness – that MA plans have the flexibility to offer. Even in states that allow Medigap plans to offer certain optional enhancements, some require that those enhancements be renewed annually throughout the enrollees’ lifetime on the plan. This lack of flexibility makes it difficult for a Medigap issuer to accept the administrative and financial risk of enhancing benefits. MA’s broad annual flexibility to include dental, vision, hearing, and wellness coverage gives MA a major competitive advantage. However, recent studies hint that the actual financial and health value of these enhancements may be small and these enhancements may be at risk going forward due to new financial pressures on MA plans.8
Individuals continuing to choose to supplement Medicare with Medigap generally do so in order to readily choose and change their providers; retain provider access flexibility when in different geographic locations throughout the year (snowbirds, for example); and cover their major health care needs without MA’s utilization reviews and the risk of prior authorizations denials.9 According to one study, more than 35 million prior authorization requests were submitted to MA plans in 2021, with 6% initially denied, hinting at barriers and complexities as well as likely delays in receiving necessary care.10
Providers may also appreciate Medigap-covered patients over MA patients, as the Medicare fee schedule is often more advantageous than that of MA,11 and there is little to no red tape surrounding prior authorization and concurrent/retrospective review. Recently, several providers have started campaigns to influence patients’ Medicare coverage decisions or decided not to take certain MA plans at all.12 Given the greatly increasing degree of health care providers’ services that will shift to Medicare patients in the coming decade, and thus the importance that payments from traditional Medicare and MA plans have on providers’ finances, these campaigns will likely grow in the coming years. Unlike the typical case for health insurers, health care providers’ finances were typically negatively affected by the pandemic, and many of them are still in recovery mode.
Across the country, MA plans have a consistent annual open enrollment period where Medicare enrollees can change carriers and plans without having to worry that an insurance company may not accept them due to their age or health status. Similar open enrollment consistency does not exist in the Medigap market. Two states, Connecticut and New York, provide Medicare enrollees with year-round Medigap guarantee issue rights. A handful of states have some annual open enrollment window where an enrollee may switch Medigap carriers (but perhaps not be able to switch plan choice). When available, these windows often do not align with MA’s open enrollment timing and are often not consistent within the state. For example, some are based on the enrollees’ birthdates (California, Idaho, Illinois, Nevada, and Oregon); the policy anniversary (Missouri); a timing selected by the carrier (Maine); or a fixed period that is consistent for all Medigap carriers (Massachusetts and, recently, Minnesota).13 In the remainder of states, Medigap tends to be a “sticky” product selection, because if seniors leave their Medigap carrier, there are no guarantees they can return to that carrier at a later date. Given that people tend to be less healthy as they age past 65, leaving a Medigap carrier is a very risky choice in most states.
Due to complaints from seniors to state legislators, there is a growing regulatory risk to Medigap insurers coming from the broadening of guarantee issue rights, which attempts to make the opportunities to change Medigap carriers similar to those that exist in the MA market. While consistency in attracting new enrollees offers growth opportunities to Medigap insurers and is in some ways always an election for a Medigap insurer willing to take all comers, this change comes with a lot of underwriting risk. Most insurers rely on the sticky nature of Medigap to help in understanding their claims risks, which helps to obtain state approval for Medigap rate increases. Upheaval of the eligibility rules comes with a high risk for unexpected losses. While MA plans have federal risk mitigation programs that help MA insurers deal with this particular underwriting risk (called risk adjustment), such protections do not exist in the Medigap market. Combined with other federal and state political risks, such as the potential for new benefit mandates or design requirements, political risk is certainly on the watch list for the Medigap industry.
Reinsurers make excess-of-loss reinsurance available for Medigap plans, though such reinsurance is not commonly sought. The fundamental homogeneity of the Medigap population, the product’s tie-in to the traditional Medicare fee schedule, and the supplementary nature of the coverage has made Medigap a relatively predictable coverage for insurers to offer.
In contrast, excess-of-loss reinsurance is commonly sought by MA plans, as MA insurers are at risk for traditional Medicare’s share of the cost, which has a much higher risk for hospitalization cost outliers, and further because MA payers are not required to directly reference Medicare’s fee schedule in their provider contracts. While this often implies in practice that MA plans are paying providers less than the traditional Medicare fee schedule would have paid on an overall basis, the disconnect from the Medicare fee schedule subjects MA providers to more risk for outlier claims.
That being said, material risks are emerging for Medigap insurers for which reinsurance could help, particularly including the high-cost specialty drugs14 covered in Part B and the growing number and type of gene and cell therapies. Medigap insurers are also experiencing risk in obtaining necessary rate increases from state regulators over time. State regulators are particularly sensitive to the rate increases affecting this population, given that most Medigap enrollees are on a fixed income. Reinsurers often provide their customers with free or low-cost research and experience studies that often can help to demonstrate the relevance for the emerging risks and the need for rate increases. Some reinsurers also provide capital-motivated reinsurance, which can help relieve some of the capital strain that relatively rapid growth can place on insurers.
Medigap is relatively more homogenous than other health plan types due to the following:
The Medigap, MA and Part D markets provide a great deal of choice – choices so numerous that they can create a lot of stress for consumers and providers alike. After a session at last year’s SOA Impact conference, one of the questions posed to the panel of health actuaries was, “Which type of Medicare plan (MA versus Medigap) would each of you choose, and why?” Our answers were surprising, but rather than me telling you why, I suggest that you pose this question to your peers and let me know what you find out.
At RGA, we are eager to engage with clients to better understand and tackle the industry’s most pressing challenges together. Contact us to discuss and to learn more about RGA's capabilities, resources, and solutions.
This article was originally published in the Society of Actuaries' March 2024 issue of the Health Watch newsletter.
1. Scott Bilder, et al. “Who Enrolls in Medicare Advantage vs. Medicare Fee-for-Service,” Inovalon, December 2019; “The Economics of Medicare Advantage vs. Medicare Supplement Enrollment,” eHealth, March 2023.
2. For Medigap plans, rebates are driven by lifetime loss ratios, while for insured commercial markets (the individual market and the small and large employer markets), rebates are driven by the most recent three preceding years.
3. National Institute on Aging. “What Do We Know About Long COVID?” NIH, February 2023.
4. “Medicare Advantage (MA) Coverage of End Stage Renal Disease (ESRD) and Network Requirement Changes,” Congressional Research Service, January 2021.
5. “ESRD Enrollment in MA Now Exceeds 30 Percent of all Dialysis Patients,” Avalere, December 2021.
6. Laura M. Keohane, Lucas Stewart, and Melinda B. Buntin. “The Slowdown in Medicare Spending Growth for Baby Boomers and Older Beneficiaries: Changes in Medicare Spending Levels and Growth by Age Group, 2007–2015,” The Commonwealth Fund, December 2019.
7. Jeannie Fuglesten Beniek. “Testimony: Prior Authorization in Medicare Advantage," Kaiser Family Foundation, May 2023.
8. Lisa Simon, Zirui Song, and Michael Barnett. “Dental Services Use: Medicare Beneficiaries Experience Immediate and Long-Term Reductions After Enrollment,” Health Affairs 42, no. 2, February 2023; Jessie Hellmann. “Medicare Advantage Supplemental Health Plans Draw Scrutiny,” Roll Call, May 2023; Ross Davies. “Medicare Advantage Payers Face Benefit Quandary,” Health Payer Specialist, February 2024.
9. Congress has devoted a lot of time on MA prior authorization concerns through hearings in 2023; there are many possible citations. The following is a link to testimony from the Kaiser Family Foundation (a premier independent source for health policy research) at a May 17, 2023, Senate subcommittee hearing titled “Examining Health Care Denials and Delays in Medicare Advantage,” which shows statistics on the level of appeals and overturned appeals by major carrier in 2021; Bob Herman and Casey Ross. “UnitedHealth Used Secret Rules to Restrict Rehab Care for Seriously Ill Medicare Advantage Patients,” STAT, December 2023; Andrew Cass. “CMS Pitched Prior Authorization Overhaul, but Timeline Remains Uncertain,” Becker’s Payer Issues, January 2024.
10. Jeannie Fuglesten Biniek and Nolan Srocynski. “Over 35 Million Prior Authorization Requests Were Submitted to Medicare Advantage Plans in 2021,” Kaiser Family Foundation, February 2023.
11. Erin Trish, Paul Ginsburg, Laura Gascue, and Geoffrey Joyce. “Physician Reimbursement in Medicare Advantage Compared to Traditional Medicare and Commercial Health Insurance,” JAMA Open Network, September 2017; Laurence Baker, et al. “Medicare Advantage Plans Pay Hospitals Less than Traditional Medicare Pays,” Health Affairs, August 2016; Andrew Cass. “The ‘Unique Implications’ of Medicare Advantage for Rural Hospitals,” Becker’s Hospital Review, February 2024.
12. Jakob Emerson. “Hospital CFO Report: Hospitals Take Aim at Medicare Advantage,” Becker’s Healthcare, August 2023; “St. Charles Health System Evaluates Participation in all Medicare Advantage Plans,” St. Charles Health System, August 2023; Rylee Wilson, “Payer Issues: California System Latest to Side-eye Medicare Advantage,” Becker’s Healthcare, August 2023; Jakob Emerson. “Ohio Health System Dropping Anthem, Humana Medicare Advantage Plans,” Becker’s Healthcare, October 2023; Jakob Emerson. “’A Short-Term Trend That Is Going to Backfire’: Will Hospitals Regret Their Medicare Advantage Divorce?,” Becker’s Healthcare, October 2023; Jakob Emerson. “Memorial Hermann Drops Humana Medicare Advantage,” Becker’s Healthcare, January 2024; Jakob Emerson. “Kentucky Health System Drops UnitedHealth, Centene Medicare Advantage Plans,” Becker’s Healthcare, January 2024; Jakob Emerson. “Hospitals Are Dropping Medicare Advantage Plans Left and Right,” Becker’s Healthcare, December 2023; Gale Scott. “Disputes between Payers and Providers Are on the Rise,” Health Payer Specialist, January 2024.
13. Louise Norris. “A Guide to Medicare Private Coverage Availability and Enrollment in Each State,” MedicareResources.org; Minnesota HF1790 93rd Legislature (2023–2024).
14. Data show that traditional Medicare enrollees were prescribed over 37% more high-risk medications than their MA counterparts in 2018. Jose F. Figueroa, et al. “Use of High-Risk Medications Among Older Adults in Medicare Advantage Plans vs Traditional Medicare,” JAMA Network Open 6, no. 6, June 2023.
