Cost is the single most important factor influencing the buying decision in case of a Medicare Supplement plan. Since the Medigap plans are standardized, the benefits remain the same to the customers and they can prefer the policy offering them the lowest premium. It is important for customers to understand how the premiums are determined by the insurance companies and how they are being charged for the same. The details of the three major pricing strategies used by the insurance companies in deciding the premiums are as follows:
Under the community-rated pricing strategy, also known as the no-age-rated pricing, the insurance companies charge the same premiums from customers irrespective of their age. The age of the customer is not the deciding factor for the premium. The community-rated pricing mechanism may have high initial premiums for the customers, however, in the long run, it offers value for money to them as the premium for the Medicare Supplement plans do not increase with age. Though the premium for the Medigap plans will not increase based on age, it can still increase due to an increase in inflation.
The issue-age pricing mechanism means that the insurance companies will determine the premiums based on the age of the customer when they buy the Medicare Supplement plans. Once the customer has purchased the Medigap plan at a particular age, the premium will not increase based on an increase in the age of the customer. Under this pricing strategy, the premium for the Medigap policies are cheaper for the customers when they buy at a younger age. A customer buying the plan at a younger age will be charged a lower premium compared to another customer buying the same Medigap plan at a later age. The premium can increase due to inflation or other related factors.
Under the attained-age pricing strategy, the premium for the Medicare Supplement insurance is fixed based on the age of the customer. The premium is determined by the age of the customer when they attained the Medigap policy. In this pricing strategy, the premiums for the Medicare Supplement plans keep going up as the age of the customer increases, unlike the community-rated and the issue-age-rated pricing strategies. In the initial stage when the customer buys the attained-age-rated priced Medigap plans, the premiums may be the lowest compared to other two pricing strategies also. However, they can end up becoming the most expensive of the three pricing strategies as the premium increases with the age of the customers.