Medicare Answers: Birthday Rule and Adverse Selection

  • Originally published February 19, 2013 , last updated December 23, 2014
  • Medicare
Medicare Answers: Birthday Rule and Adverse Selection

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This week’s question deals with Oregon's new Birthday Rule and Adverse Selection.

An Agent asks,

Oregon started a birthday rule for 2013. I have known that California has had a birthday rule for a number of years. What is scary is their premiums for the same age and carrier ran about $70-80/month higher than here in Oregon. Now our carriers are scrambling to not be the low price leader. I thought states were supposed to avoid creating adverse selection?

First of all, adverse selection is a term used in insurance and refers to a market process in which undesired results occur. Any time a Guarantee Issue situation occurs, more likely than not, it is a risk that does not lower a company’s loss ratios. With the new Guarantee Issue rule in Oregon, we have not seen large rate increases. In fact, if you take a 70-year-old female, the rate in California is about $40 per month more. Is that totally due to California’s birthday rule? Somewhat, but it is not totally responsible.

In addition to California, there are additional states that have Guarantee Issue rules. Missouri is very similar but instead of a birthday rule, Missourian’s can change each year on their policy anniversary. I had an actuary tell me once the biggest difference between California and Missouri is in Missouri the insured know that they can change where in California an agent has to tell them.

Connecticut has year-round open enrollment. If you are thinking this is good, think again. The rates are $90 to $100 per month more than Oregon.

Maine has a one-month open enrollment period every year in June for Plan A. Well who would pay money for a Plan A when it is about $90 per month there?

Your neighbor to the north, Washington, is Guarantee Issue at anytime although a plan must be in force to switch. Rates there are around $50 higher, but commission is in the single digits.

How about New York? They have Guarantee Issue year round. Guess you could buy one each month but the premium is $80 to $90 a month higher than Oregon. Commissions are so low you won’t want to ask.

So what have we learned here? Guarantee Issue states have issues or adverse selection. Oregon is young, but if companies are adversely selected against, stand by for higher rates eventually.