Medicare Supplement Insurance: Medigap Actuarial Basics

Medigap Product Design

Medicare Supplement insurance (Medigap) covers cost-sharing gaps in Original Medicare, including deductibles, copayments, and coinsurance. Standardized plan designs (lettered A through N) are defined by the NAIC, ensuring that the same letter plan offers identical benefits regardless of the carrier. This standardization allows consumers to compare policies based solely on price and company reputation. The standardized benefit structure simplifies actuarial pricing because the coverage is clearly defined.

Pricing Methods

Medigap policies use three pricing approaches: community-rated (same premium for all ages), issue-age-rated (premium based on age at purchase, with no age-related increases), and attained-age-rated (premium increases as the policyholder ages). Each method produces different premium patterns over time. Actuaries must project claim costs that increase with age, factor in Medicare benefit changes, and account for anti-selection at open enrollment periods. Lapse rates are a critical pricing assumption because healthier policyholders are more likely to switch carriers, leaving less healthy members behind.