Medigap Plan A Vs. Plan F

Why the Disparity in Medicare Supplement/Medigap Costs?

As I become more familiar with Medicare Supplemental/Medigap and Medicare Advantage plans I began to see a couple oddities, one of which I want to address in this email. Here is my video/podcast playlist of all things Medicare, by the way.

To research specific plan costs you must go to the insurance carrier. Medicare.gov, while helpful, only gives you a range of the premiums for your zip code and the providers. It will not give you the actual costs the providers charge. This is HUGELY problematic because you have to go to each individual carrier’s website and navigate the never-ending corn maze to find basic information.

As a four-generation member of USAA, I figured I’d start there to research plan specifics. One thing that jumped out a me was the incredibly high cost for Plan A relative to Plan F.

Plan A doesn’t provide nearly the benefits of Plan F so why such the high cost?

So, I asked my go-to expert for his thoughts.

Jae Oh, the author of Maximize Your Medicare, explained that it’s a basic “law of large numbers” equation. Plan A just doesn’t have as many enrollees as Plan F. Thus, because there are fewer premium payers, there is a higher risk to the pool of enrollees if one of them has a costly health issue.

For instance, 10 enrollees bear a much higher burden per enrollee to cover the 1 who gets sick.

Plan F on the other hand has, say, 1000 enrollees for the 10 Plan A has. If one gets sick the costs are borne to the remaining 999.

Now, some might ask, logically I’d add, but if 10% of the population gets sick, from a per capita basis, the enrollees in Plan F carry the same burden. This is where the law of large numbers kicks in and how it is so crucial for insurance.

Insurance company actuaries can pinpoint with almost exact precision the costs, i.e., risks, when they have a large sample size to work with. For every 1 million enrollees they can estimate the average cost per enrollee will be between $50-$75 a year, and they price the premiums based on that estimate. (I’m completely making these numbers up for illustration purposes, please be advised.)

However, the smaller the sample size the wider the range of cost estimates. A sample size of 10 could be a cost ranging from 0 to $10,000 in any given year. So they have to price accepting the risk of $10,000, even though the likelihood is it may not ever come to be. But the risk is so huge for one big claim they have to price higher… just in case. 1 big claim could sink them.

For an insurance company, it’s all about risk management.

And that’s why Plan A charges nearly 35% more than Plan F even though Plan F is clearly superior.

So, as you’re contemplating Medigap policies it’d be good to know how many people are joining you in your risk pool. If the number is small, expect to pay a higher premium. Unfortunately, this also goes for the size of the insurance company too.

United Health is the largest provider of Medigap plans, mainly because they are endorsed by AARP. Is it any wonder their premiums are lower than other insurers? The law of large numbers strikes again.

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