More States Interested in “The Birthday Rule”

It is well known that consumers have two main Medicare options:

1. Original Medicare + Medicare Supplement
2. Medicare Advantage

Medicare Advantage now makes up over 50% of the Medicare market, so let’s start there.

Medicare Advantage has annual plans. Each year, policyholders can shop for a plan that is best for them. Essentially, Medicare Advantage presents policyholders with the annual right to change plans and avoid medical underwriting.

Unlike Medicare Advantage, which is regulated federally, Medicare Supplement policies are regulated at the state level. This means there is no nationwide equivalent to the annual plan change opportunity in MA

However, several states decided to take this matter into their own hands. While there have been various approaches taken, the most popular way seems to be the Birthday rule.

Note: the Birthday rule allows consumers to change Medicare Supplement plans without underwriting around the time of their birthday each year.

Proposed New Birthday Rules

Likely Impacts

Traditionally, Medicare supplement plans realize profits towards the end of their lifetime.

This is largely due to the highly competitive commissions and agent bonuses that are paid out in early policy years. For reference, a typical policy year 7 commission might be 1/5^th the rate of policy year 1. Therefore, profits are highly dependent on strong persistency.

When you add in a birthday rule, this makes things riskier for insurance carriers for a few reasons.

In general, a given carrier’s risk pool will have less underwritten lives simply because the rule drastically lowers the amount of underwriting taking place.

Additionally, with no potential for having to pass underwriting, policyholders will be best off selecting the newest product in the market with the cheapest rate each year. Similarly, agents will be best off collecting more top-level commissions in policy year 1. For new entrants, this results in a lot of anti-selection in year 1, followed by higher lapses in year’s 2+.