Why do insurance companies Underwrite Medigap Supplement policies?

Insurance companies medically underwrite Medigap or Medicare Supplement Insurance policies to assess the risk they would be taking on by providing coverage to individuals. Medigap policies are designed to fill in the "gaps" left by Original Medicare (Part A and Part B) by covering certain out-of-pocket costs such as deductibles, copayments, and coinsurance. IMPORTANT:

Medigap policies are initially written and sold on a community-rated, issue-age-rated, or attained-age-rated basis. If you switch insurance carriers after your Initial Enrollment period, the new insurer can medically underwrite you using your pre-existing conditions as a basis for the premium.

Since Medigap and Medicare Supplements policies offer standardized coverage across different insurance companies, the only major difference for consumers is usually the cost of the premiums. Here are the main reasons why insurance companies medically underwrite Medigap policies:

1. Community rated versus Experience rated health insurance: Premiums are the same for everyone in a certain geographic area, regardless of age or health status.

2. Issue-Age-Rated: Premiums are based on your age when you purchase the policy. The younger you are when you buy it, the lower your premiums are likely to be.

3. Attained-Age-Rated: Premiums start lower but increase as you get older.

4. Risk Assessment: Insurance companies want to evaluate the health status of applicants to determine the potential cost of claims they might have to pay out. Individuals with pre-existing health conditions might require more medical services and claims, leading to higher costs for the insurer.

5. Premium Pricing: For policies that are not community-rated, the premiums for Medigap policies can be influenced by the applicant's age, gender, and health status. Those deemed to be at higher risk might be charged higher premiums to account for the anticipated higher claims.

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6. Profitability: Insurance companies aim to maintain a balance between the premiums they collect and the claims they pay out. By underwriting applicants, they can manage the potential risk and ensure that their policies remain financially viable.

7. Market Competition: Insurance companies compete with each other for customers, and underwriting allows them to offer lower premiums to healthier individuals, which can attract more customers and make their policies more appealing in the market.