Page 3 - Cover Letter & Evaluation for Isaac Kapon

Before purchasing a Medigap policy, we recommend that you call at least three insurance
companies and choose a larger company that has low premiums (a government study a few
years ago indicated that large companies tend to have slightly smaller annual Medigap
premium increases). It’s also helpful to be aware of the differences in the way insurance
companies determine annual premium increases, which is explained below.

Attachments B1 and B2 list Medigap Plan F and Plan L premiums for a 65-year-old man your age
who lives in your zip code. These premiums are from CSG Actuarial, and they do not include the
companies’ toll-free numbers. Attachment B3 is the Nevada Department of Insurance’s list of
companies’ telephone numbers. Some premiums on these lists may be out-of-date. It’s best to
use them as a starting point in determining which companies to call for current quotes.

Understanding how Medigap premiums are priced

In Nevada, insurance companies may choose one of three pricing methods in determining
Medigap premiums.

1) Attained Age Rating. Annual premium increases are adjusted for the policyholder’s
age as well as for health inflation. Policies that use an attained-age approach tend to
have lower premiums in early retirement and higher ones in late retirement.

2) Issue Age Rating. Relatively few insurers use this approach, which in theory does
not adjust premiums each year for age. Initial premiums are supposed to be higher
than in attained-age policies, while annual increases are expected to be slightly
lower. But this theory does not always apply because so many other factors
influence annual premium increases, e.g., company overhead, loss ratios, etc.

3) Community (Group) Rating. In this approach, an individual’s age is less important,
Premiums increase according to the age and claims experience of the entire group.
That means premiums are higher than for younger retirees than in other ratings
approaches, but lower for older retirees.

The UnitedHealthcare (or UHC) policies endorsed by AARP use a modified community rating in
setting their premiums. UHC policies account for roughly 30% of all Medigap sales. Because
community-rated policies typically have higher premiums for younger retirees, to make their
pricing competitive UHC offers a 30% discount to 65-year-olds who buy a policy. This discount is
reduced by 3% each year until it is gone at age 75.

With UHC policies, then, your annual premiums will likely increase by 5% or 6% a year until you
reach age 75 – 3% a year from the reduced early enrollment discount plus another 2% or 3% for
health inflation. Usually these two increases come at different times of the year – the 3%
reduction in the early enrollment discount occurs on the policy anniversary date and the health
inflation adjustment occurs when the plan raises its annual premiums. After you reach age 75,
annual increases should be smaller.

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