There are about 10 standardized Medicare Supplement plans that are each denoted by a letter, such as Plan G or Plan N. Because they are standardized by the Centers of Medicare and Medicaid Services, any insurance company that sells the plan cannot add or remove any of the plan's benefits. So, regardless of the company you choose to work with, the plan itself is unchanged. However, when shopping around for a Medicare supplement plan, it is important to understand how your initial premium is determined, and also how and why your rates may increase over time.
Initial premium
Your starting premium can be impacted by several factors such as your age, your gender, your zip code, and the plan you choose. Each company uses a combination of these factors to determine the price for your plan. Here are some things to keep in mind about those factors:
- Age – younger individuals typically have a cheaper initial premium.
- Gender – men tend to have higher claims and therefore typically have a higher premium than women.
- Zip code – premiums are determined, in part, by how the plans are utilized in a given area. Meaning if you live in an area that has higher claims, your premiums will be higher.
- The plan you choose – there are about 10 standardized Medicare supplement plans, each with a different level of coverage. Plans with higher coverage typically cost more than plans with less coverage.
While initial premium is important, simply shopping around for the cheapest plan is not always the smartest strategy. There are other factors that will become just as important over time.
How the plan is rated
Initial premium lets you know what you are going to pay for a Medicare supplement plan in the first year. How a plan is rated lets you know how that cost will increase over time. Each supplement plan is rated in one of three ways:
Issue-age rated
With issue-age-rated plans, the price is determined by the age you are when the plan is issued to you. So, someone who buys a supplement plan at age 65 will pay less than someone buying a plan at age 72. However, once you are in the plan, you stay in that age bracket. For example, if a 65-year-old woman purchases an issue-age supplement Plan G, she will continue to pay the same price as everyone else in that “class” (zip code, gender, and age group). The price for a 65-year-old woman may increase every year due to a base rate change that is influenced by inflation, medical trends, and other factors, but she will never be asked to pay a new rate because she got older. Individuals on issue-age plans may be asked to pay a different rate if they move (that would put them in a new “class”) or if they leave the plan and try to return at an older age.
Attained-age rated
Attained-age rated plans experience a base rate change as a result of things like inflation and medical trends just like issue-age-rated plans. However, their rates also increase based on your new age (the age you have attained). This means that someone on an attained-age plan will likely have two percentages that compound to equal their annual rate increase. While most attained-age plans will have an initial premium that is cheaper than an issue-age-rated plan, it will rise faster due to the multiple factors impacting their rate every year.
Community rated
Community-rated plans offer one price for everyone in the same location, regardless of age. That means a 65-year-old woman buying a community-rated supplement Plan L is going to pay the same price as a 75-year-old woman buying a community-rated supplement plan L from the same company. This rating system tends to be more appealing to older folks purchasing the plan but can be hard to sell to those closer to age 65. For this reason, many companies offer discounts to younger applicants that phase out over time. For example, the 65-year-old woman may get a 10% discount on the community-rated price. Then, at 66, she’ll get a 9% discount, and so on until age 75 when she finally pays the full price (this is a simplified example and not based on a real plan). This strategy makes the community-rated plan work more like an attained-age-rated plan that plateaus at a certain age. Regardless of the discounts, the plan’s price is still subject to the base rate change that the other rating systems experience. So, with the base rate change and diminishing discount, the premium will essentially experience a two-factor increase like an attained-age-rated plan (at least for a set period of time).
Annual rate changes
While certain rating systems may offer greater price stability, it is important to understand that none of these rating systems eliminate rate increases. Just like everything else, your supplement plan’s premium is subject to inflation and other factors. Insurance companies must adjust their rates every year to reflect the cost of healthcare and ensure they can cover the costs of their members’ claims. Medicare supplement plans offer comprehensive benefits that often cover most or all of Medicare’s deductibles and coinsurances. As the cost of those expenses increases, your benefit increases as well. This is great news in terms of your coverage, but it means the insurance company will have to pay more this year for the same kind of procedures and visits it covered last year. While all companies will have to account for these increases, it may be helpful to look at a plan’s rate history to see what the average increase has been over the last 5 years or so. If a company cannot provide you with a 5-year increase history, that can be a red flag. This might mean that a company does not want to be upfront about potential increases or that their plan has not been on the market for more than 5 years. A large organization that has a new plan like this may be engaged in something called blocking – a strategy that includes closing a plan to new applicants when the prices get too high to be competitive and opening new blocks of business at lower rates to appeal to new applicants.
The Bottom Line
When shopping around for a Medicare supplement plan, you first want to determine the plan that you think will work best for your individual needs as you age. Once you know which plan you want, you can look for a company that has a competitive starting price for the rating system you prefer. Finally, check to ensure the company has a stable, yet realistic rate increase history. Aside from rates, it is also important to consider what customer service and company care will be like. Remember, the supplement plan you choose could be the insurance you are on for the remainder of your life. This decision can feel overwhelming, but being informed and knowing what questions to ask can give you the confidence you need to make the best choice for yourself.