Profiting from the Medigap

By George P. Brockway, originally published April 20, 1987


1987-4-20 Profiting from the Medigap Title

HAVING BEEN house-bound for a few days recently, I watched a lot of daytime TV. It’s something everyone should do occasionally-say, every five or 10 years. It mortifies the brain. Only someone like Marvin Kitman, with unshakable courage and emotional stability, could possibly do it on a regular basis.

Of course, you learn things. You learn that 19 minutes into the program, Perry Mason or his client will knock on a door, be astonished to find it unlocked or ajar, and stumble over a body. This moment, which Aristotle might have called the anagnorisis, comes as a relief, because the previous 18 minutes (including commercials) have been devoted to setting the California scene and peopling it with a disagreeable assortment of land speculators, oil wildcatters, superannuated “investors,” and movie hopefuls down on their luck. The crowd could easily pass for a reunion of the President’s[1] most trusted advisers and supporters.

After a while, if you don’t have remote control to protect yourself, the commercials begin to impinge on your consciousness. You become aware, first, that most of them are hard sell: “Call this toll- free number now. Have your credit card ready.” Then you notice that certain sorts of business seem to find TV promotion particularly effective. The sort that attracted my attention (it is, after all, directed at people like me) was insurance, especially Medicare supplements.

In these insurance commercials an oily or folksy “personality,” usually from the entertainment world, earnestly recites some scary figures on what Medicare doesn’t cover. This is known in the trade as the Medigap, and we’ll be hearing a lot about it as the national debate over catastrophic medical expense [2] continues. I must confess that most of these personalities (except for Roger Staubach) seem to have achieved eminence unbeknownst to me, but they do read their lines well. One of them so impressed me with his concern for my welfare that I decided to call the toll-free number (“The information is free, and so is the call”). Having called one, I then called them all.

Eliminating duplications (different entertainers, different phone numbers, but same outfit), I made six calls. Several were to Valley Forge, Pennsylvania companies. As Samuel Johnson told us, patriotism has its uses, even if it is only subliminal. The others were likewise to Pennsylvania or to Delaware companies-a curious concentration that suggests something about those states’ insurance regulations. The pleasant young women who answered my calls promised information in the mail in one to six weeks, and by golly they delivered. Follow-ups come trooping daily, but as promised, no salesman has visited me (at least not yet), and there has been only one telephone pitch.

The mailing pieces are wonderfully elaborate. In accordance with received direct-mail doctrine (I once dabbled in that black art), each has a long letter signed by the TV personality recapitulating his sales pitch, addressed to me by a computer (one of which knows me well enough to use my first name). In addition there are several separate circulars (the theory is that one of them may catch your eye as you fumble to pick them up and stuff them in the wastebasket).Some are printed in four colors and gold, some merely on colored paper. They describe the great risks you run by not having the coverage set forth in the various schemes being offered, and give an ecstatic description of the sponsoring company, together with its evaluation in Best’s Insurance Reports and an emotional endorsement from “Mrs. P.M.K., Lawrence, Kans.” A formal application blank that looks like a stock certificate, a plastic identification card for your wallet, and a return envelope marked “RUSH” in big red letters complete the pricey packet.

Although the programs vary slightly from company to company, the sales pitches invariably emphasize the rising cost of hospital care and the declining percentage of it covered by Medicare.

The hospitalization Medigap runs from a deductible of $520 to a total of $20,020 after 150 days of confinement. That’s pretty scary, but the insurance company will pay every cent, plus all “Medicare allowable” hospital expenses for one extra year. That’s pretty comforting, until “Medicare allowable” inadvertently reminds you the Medigap is by no means closed when you buy one of these policies.

But look you: The average hospital stay for senior citizens is only 8-9 days, with stays of 150 days very rare indeed. Further, in very small type the circular hedges: “Sickness, injury, or any physical condition for which you received medical advice or medical treatment during the six months prior to your Certificate’s

Effective Date will not be covered until six months after such date. Also, any illness, treatment, or medical conditions due to an act of war (whether declared or undeclared), and any services or facilities not covered by Medicare, are not covered.”

Noting that nursing homes are thus excluded in war or peace, let’s go on to examine that hospital stay. One company offers a “deluxe” and a “basic” plan. The only difference between the two is that the deluxe covers the initial $520 deductible. The difference in cost to you is $18 a month, or $216 a year. The company clearly figures the deluxe plan will at the minimum earn back the deductible exposure if the average policyholder goes to the hospital no more than once every 29-30 months-a very safe bet once you stop to think about it. The $520 deductible sounds formidable when mouthed by a TV personality and it certainly is a snide provision for a government program that pretends to cover the citizens of the republic-yet $216 a year is a truly formidable price to pay for what is in effect $304 worth of insurance.

As I’ve mentioned, Best’s Insurance Reports is often quoted to show how reliable the advertiser is. An exceptionally profitable company is obviously exceptionally reliable; it will be able to pay all probable claims against it. But there is an irony here: A company that is exceptionally profitable is probably charging exceptionally high premiums. Best’s reports this side of the business, too. The relevant statistic is the loss ratio the total of claims paid divided by premiums charged.

Among the TV advertisers I checked on, the worst had a loss ratio of 46.4 per cent, and this would have been even lower if allowance had been made for the profits the company makes by investing its float. Another’s loss ratio was 47.5 per cent, and the rest were in the low 50s. In contrast, the plan of the American Association of Retired Persons (AARP) has a loss ratio in the upper 70s. Yet as any AARP member knows, their plan carries a considerable advertising load too. AARP, Blue Cross and Blue Shield, and the similarly effective extensions of company group policies can’t quite dispense with selling expenses.

Now, everyone has tales to tell of Medicare delays and foul-ups, but at its bureaucratic worst it is far more cost-effective in rendering service than the best of the plans sold by the insurance industry. Its loss ratio is in the high 90s.

The reasons for Medicare’s relative efficiency are not far to seek: (1) Probably the most important is that it has no advertising or sales overhead; (2) next most important, no profits have to be made for stockholders; (3) it requires no cash flow to cover high executive salaries (the top government salary  wouldn’t tempt an assistant vice president from a commercial company); and (4) it can operate with little or no reserve, because the government won’t let it go bankrupt even if actuarial expectations should prove disastrously wrong. (The presumed need for a reserve is at the root of the wails that Medicare rates must be raised. A tortuous argument may be made for a Social Security reserve; but with Medicare, both premiums and payouts are current, and the margin of actuarial error is very small. There’s no necessity for me to pay now for service I may need 10 years hence, since I’ll be paying as long as I live.)

CON ARTISTS separate the unwary from their money in many ways. They sell junk jewelry on TV; why shouldn’t they sell junk health insurance?

The difference is that no one has to have jewelry, whether junk or not. No one has to have sugar-free chewing gum, or the latest in soft drinks, or a set of picture books about ghosts, witches and other supernatural epiphanies. Consequently, in all these cases-indeed, in the case of most products that enlist the hearts and minds of advertising apparatchiks- the price of the product is of little social importance. It is even of little personal importance, as witness the fact that proprietary drugs far outsell their less expensive generic equivalents.

Health insurance is something no one can do without. We all get it somehow. We don’t necessarily buy it, and it’s safe to say that no one buys all that might be needed (a friend of mine was told by an agent that “adequate” coverage would cost $1,800 a year for him and slightly less for his wife). If we don’t buy it, where does it come from? We’re then self-insurers, of course. We run the risk ourselves. This may be by necessity or design. We may not be able to afford the premiums, or we may be able to pay cash for the most esoteric medical attention money can buy. But one way or another, bad or failing health is a risk we must and do face.

Some kind of coverage being vital and inevitable, health insurance is no longer in the same class with soft drinks and picture books. The risks will be covered. The question is, how well?

In the United States today they are not covered well. In his new book The Next Left, Michael Harrington tells us that the United States devoted a higher percentage of its gross domestic product to health care than any other industrialized nation, yet has the least satisfactory health service. While this is partly a consequence of our paying doctors on a fee-for-service basis, it is also a consequence of our turning so much of our health insurance over to profit-oriented companies, and leaving so much of the rest to the vagaries of self-insurance.

We know that competitive enterprise is supposed to develop better products at better prices, and we see this actually happening. But in the health insurance “industry” what we mainly see is the development of more imaginative ways to sell a “product” that should, in a democratic society, be uniformly available to all. That is a fact to keep in mind as the Administration intensifies its effort to turn any improvement in Medicare coverage over to the insurance “industry.”

The New Leader

[1] Editor’s note: President Reagan was originally a movie actor

[2] Editor’s note: this phrase is italicized to remind the reader that it was written 25 years ago and describes in the same terms the challenges of funding medical costs that are used in 2012.

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