Medicare Supplement Projection and Analysis
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1 M e d i c a r e S u p p l e m e n t Market Projection By Bryan R. Neary FSA, MAAA and Brynn Korolchuk, MBA Research Paper 1
2 Introduction The Medicare Supplement market appears to offer long-term sustainability. More than 62.3 million individuals are expected to be enrolled in the Medicare program by the year Our research indicates despite decreasing Medicare Supplement enrollments over the last five years opportunities for insurance carriers, agents, and marketing organizations in the Medicare Supplement market will actually increase over the next 10 years (Graph 1). Here we present a summary of our research method (with assumptions) and conclusions. Method Surprisingly, we found very little research results on Medicare Supplement market projections. So we collected data and then used it to develop actuarial models for projecting future Medicare Supplement enrollments and premium levels over the next 10 years. Current Medicare Eligibility Assessment To determine how Medicare Supplement would shake out, 10 years from now, we first had to look at the big picture Medicare eligibility. We know the overall Medicare population is going to grow over the next 10 years. The question is, how much? Answering this question first is critical, given the influx of individuals entering Medicare. We built a proprietary projection model, which projects growth in Medicare beneficiaries over a 10 year period, using the following demographic factors: Age Eligibility Status (Aged vs. Disabled) Gender Income Level Region (Urban vs. Rural) Reported Health Status Type of Supplement Health Insurance (Med Supp, Med Advantage, etc.) 2
3 Table 1, following, provides a snapshot of percentage distributions of each of these characteristics used in our projection. Table 1 Medicare Beneficiary Demographic Data (in 000's) Category All Enrollees Medicare Supplement Medicare Advantage Total Enrollment % Number % Dist. Number % Dist. Number % Dist. Part A 46, % 9, % 11, % Part B 42, % 9, % 11, % Eiligibilty Status Aged 38, % 8, % 9, % Disabled 7, % % 1, % Age Under 19 Years 3 0.0% 0 0.0% - 0.0% Years % % % Years 3, % % % Years 3, % % % Years 20, % 4, % 5, % Years 12, % 2, % 3, % 85 Years or Over 5, % 1, % 1, % Gender Male 20, % 3, % 4, % Female 25, % 5, % 6, % Income $10,000 or less 8, % % 1, % $10,001-$20,000 12, % 2, % 2, % $20,001-$30,000 8, % 2, % 1, % $30,001-$40,000 8, % 1, % 1, % $40,001 or more 8, % 2, % 1, % Metro Status Urban 37, % 6, % 8, % Rural 9, % 3, % % Health Status Excellent 19, % 4, % 4, % Very good 14, % 3, % 3, % Fair 9, % 1, % 2, % Poor 3, % % % Sources: Medicare and Medicaid Statistical Supplement 2. Current Medicare Beneficiary Survey Kaiser Family Foundation analysis of the CMS Medicare Current Beneficiary Survey Disclaimer: Limited information was available for some of the categories and certain assumptions have been made based on analysis of the data. 3
4 Medicare Eligibility Projection (i.e. Baby Boomer Impact) Our Medicare beneficiary projection is shown in Table 2, following. To validate the projection, we compared the results to the Center for Medicare and Medicaid Office of the Actuary projection of future Medicare Beneficiaries. Table 2 Total Medicare Beneficiaries (Aged & Disabled) in 000s CSG Actuarial % Increase Office of the Actuary % Increase Year Projection By Year CMS Projection (1) By Year ,385 44, , % 45, % , % 46, % , % 48, % , % 49, % , % 50, % , % 52, % , % 53, % , % 55, % , % 57, % , % 58, % , % 60, % , % N/A N/A Source: (1) Projection taken from April 22, 2010 Letter from the CMS Office of the Actuary. Footnote: Years 2008 and 2009 are provided as a reference point and are taken from the 2009 and 2008 Medicare Statistical Supplement. Historical Medicare Supplement Assessment To project the future of Medicare Supplement, we had to understand historical market trends. Overall, the total number of Medicare Supplement policies has declined over the last five years. Table 3, following, features a summary of data found in the NAIC Medicare Supplement Loss Ratio reports showing total policies and premiums by year. We then added a column showing percentage of Medicare Supplement policies, within the broader Medicare market. Table 3 Historical Medicare Supplement #'s (in 000s) 1 Total Policies Total Average % of Medicare Year Inforce Premium Premium Eligibles ,361 $18,749,062 $1, % ,260 $19,433,500 $1, % ,102 $19,224,000 $1, % ,546 $18,494,000 $1, % ,491 $19,025,000 $2, % ,452 $19,467,000 $2, % Source: (1) Annual NAIC Medicare Supplement Loss Ratio Reports 4
5 So, why the decline? We had to identify the determining factors of decline before making our projections. It is especially surprising, given that the market is set up for success due to: Hundreds of plans are available, in every part of the U.S. Distribution of the plans continues to evolve, including traditional agents, telephonic sales, direct mail, and internet sales. With expanding Medicare cost-sharing components, the need for Medicare Supplement grows. Our analysis of the data and broader market research suggest several reasons for the decline. First, Medicare Advantage (MA) enrollment has increased from 4.8mm (2004) to 11.9mm (2010). Increasing subsidies to MA plans, rebates to enrollees (lower cost sharing, additional benefits, or enhanced drug coverage), and the introduction of Medicare Part D in 2006 have caused beneficiaries to re-evaluate their Medicare coverage. As a result, MA plans have become more attractive than traditional private fee-for-service Medicare and Medicare Supplement persistency and new sales have declined. Second, as shown in Table 3, the cost of Medicare Supplement insurance coverage has increased from According to Kaiser Family Foundation, almost half of all Medicare beneficiaries (47%) had an income below 200% of the Federal poverty level. Sixteen percent are actually below the standard Federal poverty level. Table 3 displays the average cost of Medicare Supplement insurance over the last 5 years, which has risen 13.8%. So, as the cost of Medicare Supplement insurance continued to grow ( ), a smaller percentage of the population was able to afford Medicare Supplement plans. Third, and similar to the second reason, the number of individuals enrolled in Medicare Part B has decreased, which is required for the purchase of Medicare Supplement. When comparing Part B data from 2000 to 2010, enrollment has declined from 95% to 91%. One of our assumptions is that the decline may be related to the rising costs of Part B premiums, having increased from $45.50 per month in 2000 to $ in These reasons/factors were included in the development of our projection. Naturally, we were especially curious to learn whether or not the declining market trend would continue. 5
6 Medicare Supplement Projection Our Medicare Supplement projection is featured in Table 4, following. Assumptions made include: Demographics of current Medicare Beneficiaries are accurate. Demographics of future Medicare Beneficiaries will not experience dramatic change in the future. Mortality Rates 2000 U.S. life table with mortality improvements (disabled individuals were projected, assuming a 50% higher lapse rate). Current policy lapse rate and replacement rates will not experience dramatic change in the future. Annual Medicare Supplement rate increase trends will not experience dramatic change in the future. We also considered the effect of trends in Medicare Advantage, retiree health benefits, and other types of supplemental coverage. Table 4 Historical & Projected Medicare Supplement #'s (in 000s) Total Policies Total Average % of Medicare Year Inforce Premium Premium Eligibles ,361 $18,749,062 $1, % ,260 $19,433,500 $1, % ,102 $19,224,000 $1, % ,546 $18,494,000 $1, % ,491 $19,025,000 $2, % ,452 $19,467,000 $2, % ,474 $20,053,541 $2, % ,603 $20,876,468 $2, % ,825 $21,897,346 $2, % ,021 $22,860,142 $2, % ,235 $23,851,537 $2, % ,517 $24,995,072 $2, % ,678 $25,809,891 $2, % ,955 $26,861,260 $2, % ,192 $27,756,788 $2, % ,378 $28,436,088 $2, % ,581 $29,050,397 $2, % NOTE: Factors that would increase the likelihood of a sustained decline in the Medicare Supplement market, through 2020 include: Repeal of the current health care reform law. Dramatic increases in health care costs. Continued economic hardships. 6
7 Conclusions Data suggest the Medicare Supplement market, despite historical decline, show signs of growth. We conclude there are four opportunities for agents, agencies, and carriers to consider, based on our findings. Opportunity #1 Baby Boomers As our projection shows, the total population of Medicare eligible individuals will increase by more than 15.4 million people over the next 10 years. This should provide some lift to Medicare Supplement sales, even if the overall penetration continues to decline. Opportunity #2 Medicare Advantage (MA) Reductions The recent health care law includes certain Medicare provisions that, beginning in 2012, will gradually reduce subsidies paid to Medicare Advantage plans, resulting in less generous benefit packages. According to the CMS Office of the Actuary, when these MA provisions are fully phased in, enrollment in MA plans will be lower by about 50%, from 14.8 million (projected level under the prior law) to 7.4 million (projected level under the new law). Our Medicare projection does anticipate some decline in Medicare Advantage enrollments over the next ten years, though not as a dramatic as the CMS projection. Our assumption is that MA plans, under the new star rating program and the bonuses available under this program, will still be able to provide quality benefit packages. In any event the impact of health care reform on Medicare Advantage should benefit Medicare Supplement into the future. Opportunity #3 Decrease in Retiree Health Benefits Economic issues and accounting changes continue to force many companies and municipalities to eliminate or alter health care benefits for their retirees, who will in turn (along with Medicare) incur more health care burden. According to the Medicare Beneficiary Survey, the number of individuals receiving retiree health benefits has decreased 25% over the last 20 years. Opportunity #4 New Medicare Supplement plans The new health care law has a little known provision that directs the NAIC to research additional new plans that would be introduced in the year The purpose of these new plans would be to eliminate first dollar coverage, as is provided by today s Plan F. As was seen with the introduction of new Plans M & N in 2010, any changes to a commodity product such as Medicare Supplement, will create buzz in the marketplace and possibly generate an increase in sales. Another possible benefit would be forcing the market to move away from high cost, first dollar coverage and toward lower cost plans. These plans are available today but are often ignored in favor of Plan F. Lowering the cost of Medicare Supplement could open the market up to individuals that could otherwise not afford supplement coverage. For More Information... On this project or to learn how CSG Actuarial could help with your own project, please contact us by ing research@csgactuarial.com. 7
8 About The Authors Bryan R. Neary FSA, MAAA Bryan is President and founder of CSG Actuarial. With more than 14 years of actuarial experience, at all levels, he provides uniquely relevant and business-smart services. Bryan is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. He holds a Bachelor of Science in Actuarial Science from the University of Nebraska, Lincoln. Call him at (402) or bryan@csgactuarial.com. Brynn Korolchuk, MBA Brynn is a tenacious researcher who is responsible for CSG s growing Competitive Intelligence business. She started her career in insurance underwriting Monoline Workman s Compensation risk in the Western U.S. Brynn holds a Bachelor of Science in Marketing from Creighton University and a MBA from the University of Nebraska at Omaha. Call her at (402) or bkorolchuk@csgactuarial.com. 8
9 Competitive Intelligence and Actuarial Consulting For the insurance industry. About CSG Actuarial CSG Actuarial is a competitive intelligence and consulting firm that gets the data, checks the data, and provides the data N 50th St research@csgactuarial.com Omaha, NE
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