Life Insurance Myth #2: Final Expense Trickier Than It May Seem

Open the mail, find a guaranteed life insurance advertisement. This stuff can work if you are looking for $10,000 benefit, because the price difference is not large in dollar terms. However, if any of these factors are different, then you should be more careful, because the premium can vary by 30% a year, which may not matter at $10 a month, but it does at $100/month.

Factors that make may work against you (or for you)

  • Age
  • Gender
  • Incurable disease
  • Height / weight
Here’s a hint: if you are receiving a flyer, you may not know that the cost of sending the flyer is astronomic, relatively speaking. Therefore is the premium likely to be the best available? Farmer Fred knows the answer, and so do you.

Medicare Advantage Disenrollment Period

Runs from January 1, 2018 – February 14, 2018

What You Can Do

  • Cancel your Medicare Advantage plan, and return to original Medicare
What You Cannot Do
  • You cannot switch from one Medicare Advantage plan to another, just because you feel like it
  • You cannot switch from one Prescription Drug Plan to another, just because you feel like it
Not So Fast
It is already obvious that “timing matters.” It is a tired, over-used phrase. The phrase that is largely unknown? “The ORDER matters.” That is the case here. You should not cancel your Medicare Advantage plan before being accepted into a Medigap plan FIRST. The fly in the ointment is that Medigap enrollment may require medical underwriting, which has become more difficult in the very recent past. It bears repeating, the rationale for how this has occurred was stated last week, and is restated here.Medigap Carriers Can Deny Your Application
If you are greater than 65.5 years, or do not qualify for a Special Enrollment Period that allows Guaranteed Issue under Medigap Protections, then Medigap carriers can deny your applications. It gets worse from there.

Anecdotal Evidence Exists That Underwriting Has Notably Tightened
Most would not know, I am just a guy. But, that guy happens to have global market bond-trading experience. And the simple exercise is to compare red delicious apples to golden delicious apples to granny smith apples, over and over and over. The weather changes, the demand changes, the prices change slightly. Sometimes the prices get closer together, and sometimes a particular version gets more expensive versus another. From the observed data, the reason is inferred, it is not explicitly stated why.
What in the world does any of this mean, and what is it doing in this Newsletter about Medigap?
Price Competition is Brutal 
Put on your common sense hat, and put yourself in the shoes of the sellers (health insurance carriers). The individual health insurance market is just now profitable after a bruising few years during adjusting to the Affordable Care Act. When the ACA was first announced, policyholders complained (wait, I thought the President said “If you like your insurance, you can keep your insurance,” something that I found IMPOSSIBLE to believe, and worse, equally impossible that the President did not understand this, yeah I am calling “Pants on Fire” to President Obama). There is a reason that Medicare Advantage has become some much more competitive and there is reason that the health insurance companies are merging: Medicare is the only reliable market. Medigap is a standardized contract, the species of apple is precisely the same, the competition is based on price alone.
Health Insurance Companies Aren’t Gamblers
Whenever I hear the comment that “Well, we don’t know the future, it’s like gambling.” WRONG. WRONG. WRONG. If that were the case, how is it that 7 carriers are offering Medigap to 65-year olds, within the same zip code, within $5 a month of each other?Does this sound like “gamblers” who have randomly agreed on the same price? NO WAY. Someone is calculating, not guessing. Does this sound like collusion? Let’s calm down, the carriers are required to spend 80% of premium dollars on claims, or they must rebate the balance to existing policyholders.
When Brutal Competition Exists, Farmer Fred Wants to Avoid Losses
So now you are Farmer Fred, selling apples. Your neighbors have the same weather, the same soil (for the most part), the same access to fertilizer and buyers. How does Farmer Fred make money? Farmer Fred has a way, and that way to avoid losses. Ask him, ask yourself, it’s self-evident. How do health insurance carriers avoid losses when the price competition is this difficult? The same way. How does this occur? Avoid applicants that they are allowed to refuse, within the rules that govern them.If You Have Understood Up to Here, Then…
It’s clear. If you are the seller (health insurance carrier), and the price competition is this difficult, and yet you want to stay alive, you avoid losses. If avoiding losses means that you are a tougher grader, i.e. apply more difficult health underwriting standards, then so be it. And that is what I am reporting right here: it is clear to me that health insurance carriers have tightened underwriting standards to combat the brutal price competition. That is the only logical conclusion, and it is supported by the anecdotal evidence we have seen.

“Fair” Is A Place Where You Judge Pigs and Cattle
Consumers may think this seems unfair. The sellers, the calculators would reasonably think just the opposite. A prostate cancer patient, newly diagnosed at 64.9 years old, can enroll in a plan for $150/month, AT MOST, in most locations around the nation, and have $0 copays and deductibles for the year ahead. Farmer Fred would not sell a single apple to this person, not one. But, the rules tell Farmer Fred that he has no choice, no way that he can deny this applicant, and no way that he can avoid paying the bill that is certain to arrive. By the way, if that applicant has enrolled in the same carrier that you have your policy? Your premiums are paying for his claims, and all else equal, your premiums are going higher in the future because the risk of the entire policyholder pool has increased. So let’s step back from the idea of “It’s not fair.” I digress.
The point here is that if you are the buyer and the rules are enormously in your favor at a particular point in time, then it has always been the case that you should take full advantage, immediately. Of all financial contracts available, Medicare is alone at the top of that list, bar none..

If You Still Want Medigap, What?
First, you can apply for Medigap, and find out the outcome. Then, and only then, you can enroll in a standalone Prescription Drug Plan (Part D), using the Medicare Advantage Disenrollment Period SEP, which will automatically eject your MAPD. Voila. Looks obvious right? Don’t get me started….

#AHCA Recap: What You Should’ve Learned

Either Way, Someone Is Not Going to Be Happy

Here is what to expect.
a. Heath insurance premiums are almost certainly going higher. The reason is NOT because carriers are ripping you off. It IS because the “risk corridor” provisions are now gone. Premiums are determined by MATH, not politics. The PPACA had a mechanism to spread losses among the other carriers, if a health insurance carrier suffered losses due to large claims. However, those provisions have now expired, meaning that carriers will continue to bleed money, something that companies, armed with math, do not like to do. That means higher, definitely higher, premiums in the future.

b. The President can make health insurance markets (the ACA) more unstable, but won’t be solely to blame. The most distasteful thing for me to read is a wrongly-placed overgeneralization. The fact is that the President (or the HHS, same thing), has substantial leeway within the ACA. That said, the original problem with the ACA is that there is an inadequate incentive for young and healthy people to enroll in health insurance. That leads to groups of policyholders that are older and sicker, which leads to higher bills to be paid by the carriers, and that leads to higher premiums.That incentive can be notably weakened, which can leave the remaining policyholders to be those that are sick. Now read point a. Insurance premiums are determined by math, not politics. It is a certainty that you will read accusations that the President is creating instability in health insurance markets. Actually, health insurance markets are already unstable, due to the nature of the ACA. And while the President can make it worse, that isn’t the same thing as he will be entirely to blame. It is an almost-guarantee that a partisan somewhere will try to pin the ENTIRE thing on one person/reason or another. It isn’t that simple, it never is.

c. Boehner was right. A quote from this article, a month ago:

The former speaker noted the difficulty Republicans would confront in getting everyone on board.
“This is not all that hard to figure out, except this: In the 25 years that I served in the United States Congress, Republicans never, ever one time agreed on what a healthcare proposal should look like. Not once,” Boehner said.
He said lawmakers were too confident in how easy they thought the process would go.
“All this happy talk that went on in November and December and January about repeal, repeal, repeal — yeah we’ll do replace, replace — I started laughing because if you pass repeal without replace, first, anything that happens is your fault. You broke it.”
Boehner said he warned GOP leaders about repealing Obamacare without a replacement ready because the members “will never ever agree what the bill should be.”

Comment:  Boehner’s description could not possibly be any more precise.

d. But…this is probably not over. This article from the New York Times: Affordable Care Act Repeal Is Back on the Agenda, Republicans Say (Link). We will see, but you can recall that I had a pretty simple list of things that could’ve been done to the AHCA in order to fix it. This is important to the President because the rest of the domestic agenda, like tax reform, will depend on the funds saved by reducing the amount paid to Medicaid. As mentioned before, the AHCA is a Medicaid reform bill, more than anything else.

e. Government and health insurance carriers are here to stay, rightfully so

The idea that the government has no business in the health insurance market is simply wrong. The idea that health insurance companies have no place in the healthcare industry is also wrong. In other words, the extremists, on both sides of the spectrum, are (unsurprisingly) wrong. Before you read too many opinionated articles, that may appear to be an impartial reporting of facts, let’s take a look.

If you leave it entirely to individual choice, the person that is uninformed is forcing financial risk upon the entire population. Let’s take the example of a world where there are only 2 people on the planet, and robots deliver healthcare if you need it. One person purchases health insurance, and the other does not. The one that doesn’t purchase insurance gets sick, cannot pay, leaves the bill unpaid. The second one goes to the hospital. GUESS WHAT? The price is higher, the out-of-pocket cost is logically higher. The probability of this happening increases whenever a person goes without health insurance. The result is that when you read something like “people should freely choose whatever they want,” that is the fatal flaw of that argument. Those same people are arguing that financial efficiency is being sacrificed, when in fact, it is that the uninsured are making financial risk decisions on behalf of the entire rest of the population, whether they know it or not.

If you think that taking away health insurance carriers will solve this, then you are also presuming that the government is capable of calculating, allocating the funds, and executing the system efficiently. See that lonely island on the horizon? You are its only inhabitant.


Maximize Your Medicare (2016 Edition) Preview

Days away….

Maximize Your Medicare (2016 Edition) will be released shortly. Attached is an entirely new section, an expert’s addenda.

Health insurance and Medicare are, ultimately, financial contracts, that can be compared to an option (like a put or a call). SInce we know how to evaluate the financial value of options, we can simply compared Medicare to an option. From there, we can evaluate the financial value of Medicare, Medigap and Medicare Advantage.

Experts’ Addenda


This special section is intended for those with academic backgrounds or practical experience in financial and/or business matters. Or the perversely curious.

Insurance Is An Option

In order to understand the conclusions contained in Maximize Your Medicare, it is important to understand that insurance is, at the end of the day, an option, much like a put or a call on a stock.

The definition of an option may be difficult to grasp. An option is the right to buy or sell a product (for example, a stock) at a particular price, if a certain set of conditions are met. Many people will understand what a put or a call option is, from the financial markets.

The key point is that the value of the contract increases rapidly under certain conditions. A call option on a stock increases in value greatly as the underlying stock approaches the strike price. In a very similar way, the value of health insurance (including Medicare) also rises dramatically if you incur medical costs, because you receive benefits which can exceed your premiums by a great deal.

You may recall the introduction or the practice of this book when I said that “health insurance is not the same as other insurance.”  The reasoning that I used was that the value of auto insurance the value stops increasing, because you cannot collect benefits that exceed the value of your car.

However in the health insurance example, value of benefits that you can receive can be unlimited. In fact, the PPACA mandates that the lifetime benefit amount you can receive is unlimited. This fact alone makes health insurance far more valuable than auto insurance, because the upside (value of the benefits received) is unlimited, and that is protected by law.


Health Insurance Is Different

Health insurance is not the same thing as auto insurance or homeowner’s insurance. Nevertheless, this is the kind of comparison that you can hear in every coffee shop, in every corner of the nation. Comparing health insurance to auto insurance is like comparing apples to oranges. They are both a type of fruit, and that is where the similarity ends. It is a fundamentally incorrect comparison to make. Why?

Say you get in a car accident, and you completely wreck your car, but walk away unscathed. What is the cost to you? Do you know? Open a Kelley Blue Book, and you will be able to determine the salvage value of your car within hundreds of dollars. You can replace your car with an almost-exact copy, at a well-defined price.

On the other hand, imagine that you become seriously ill, and are diagnosed with a disease. What are your costs then? Can you predict the price of recovery? You cannot predict when those costs will cease. You cannot predict if you can go back to work in order to repay those new, unknown costs. You cannot calculate it, and your estimate can be tens of thousands of dollars. The cost can bankrupt your household, and the outstanding liability will make you indebted to the government for the remainder of your life.

In other words, the downside of not protecting yourself in case you become seriously ill is many, many, many times worse than getting into a car accident. You cannot estimate the maximum loss of money, time, and well-being if you become ill. And the older your get, the more extreme it becomes, because the likelihood of becoming seriously ill is greater.

Options Are Priced Using Probability

Let’s get back to the comparison between health insurance, Medicare, and options from financial markets. Options are financial contracts that have a mathematically-derived theoretical value. For financial market professionals, this is the widely known Black-Scholes formula. For the purposes of this book, the calculation itself isn’t important, but the formula has intuition which we will address here.

If you look at the Black-Scholes formula, it is largely dependent on probability. To keep it relatively simple, people are familiar with the “bell curve.” This is what statisticians would call a graph of the “standard normal probability” curve. In order to have this, curve, certain assumptions are made. An important assumption is that every data point is independent, i.e. the results of any previous results do not affect the probability of future results. In theory, that sounds right. In practice, however, it is flawed. Why? It isn’t independent if you have specific information about your individual circumstance.

The implication of this fact on health insurance and Medicare is powerful. When you are 64.9 years old, and preparing to consider your Medicare configuration, you will very likely be aware of individual or family health history to some degree. The sellers of health insurance (carriers) are not allowed to adjust the price, for any reason, even if you have specific information. What are some examples of “specific information?” Medical history and family history fits this description.

Let’s look at it from the seller’s (carrier) point of view. If you are the seller, and you will be required to pay benefits if your customer (you) incurs large medical bills, and you knew this in advance, wouldn’t you want to charge that customer a higher premium? In addition, the liabilities that you would incur are potentially unlimited. Wouldn’t you want to charge that customer more? The intuitive answer would be yes, but the fact is that regulations make this impossible. That means that if you have a pre-existing medical condition, or a medical history that makes it very likely that you will require ongoing expensive, medical care, that the price of Medicare Advantage or Medigap are, if anything, too low.

You don’t have to know anything about insurance in order to understand this. Just compare Medicare to the price of health insurance for a 64-year old: high-quality health insurance, which would still be inferior to Medicare, costs more than $1000/month.

Everyone is “Short” an Option

In financial markets, you can benefit, as an investor, if any financial asset goes up OR down (that is possible). You can buy or sell an option, a financial contract, that increases in value if the price of gold increases. In addition, you can also buy or sell a set of securities that go up if the price of gold decreases.

As your healthcare costs increase, your net worth (not to mention your ability to make money), will most likely to decline. The extent of decline has no limit in extreme scenarios. That is very similar to being “short” an option, much like the investor that is short the price of gold, which is damaging to that investor if the spot price of gold increases. Everyone, irrespective of financial resources, is “short” this option, i.e. everyone is getting older, and the probability of requiring medical care is increasing with time.

The bottom line: buying health insurance is like buying an option at a regulated price. That option protects your household net worth, because it allows you to not spend your savings/investments, at the time that you require medical services.

Sources of Volatility

Back to the Black-Scholes formula. The value of a put or a call option increases as volatility increases. In simple terms, that means if there is a wider array of outcomes possible, the shape of the bell curve will be different (but it will be symmetric).

When considering the value of Medicare and healthcare cost planning, the volatility increases under a wide variety of situations. Let’s take a look at a few, and then the value of health insurance, and the specific case of Medicare, can be understood more completely.

Substantial assets. If you have substantial assets, you can use this method of thinking to understand other conclusions.  Since health insurance will continue to pay benefits to the policyholder, irrespective of amount, that means that the wealthier the person is, or the more assets that person has, the actual financial value of Medicare or health insurance contract increases. Why is that? The reason it’s simple: you have more to lose (which is the same thing as saying that your volatility is higher). Thus, the contracts protect more, and are therefore, more valuable. Period.

Medical and family history. Let’s say you are a female, and your mother, grandmother, and sisters have been afflicted with breast cancer. Can you say that you are the “average” case? No. Put another way, this female is subject to a wider variety of outcomes, her volatility of outcomes is higher. The price of health insurance is substantially more valuable to you, and the carriers cannot adjust the selling price to reflect this fact.

Financially restrained. For those that need to save every dollar, Medicare Advantage has all the advantages listed above, and another important one. Every Medicare Advantage plan must always include an annual out of pocket maximum limit. The value of the option is high, and when coupled with financial assistance or Medicare Advantage plans with no additional premium, the cost is very, very low.

The bottom line: health insurance, especially under the Affordable Care Act, and certainly under Medicare, is, if anything, and underpriced way to protect your assets, irrespective of the level of your household net worth.

Comparing Apples to Apples

Much of the confusion regarding Medicare is that there are a wide variety of choices and wide differences in price. Much of the logic and analysis of how to approach Medicare is actually the result of thinking about comparing the options that you enjoy (due to rules of Medicare) and comparing the benefits that you can receive, for a particular price.

Let’s take Medigap Plans C and F. If you look at the grid, they differ in only one regard: the Part B Excess Charge. Under Plan C, the patient/beneficiary is responsible for the Part B Excess Charge. Under Plan F, the carrier will pay for the Part B Excess Charge. If you put the two plans together, then it should be self-evident: Plan F is slightly superior in coverage, since the language is identical in every other respect, down to the last letter.

Now the question will be if the difference in premium is “worth it.” It should be clear that if you can purchase both plans at the identical price, then Plan F will provide a slightly better set of benefits for no extra cost, when compared to Plan C. Usually, Plan F is more expensive than Plan C. Depending on how much the extra coverage is “worth,” Plan F may or may not be a better alternative.

How do you decide what it is “worth?” Just re-read this chapter from the beginning: if you are subject to more volatility (due to your health situation or financial results), then the extra coverage is worth more to you. It is as simple as that. You can continue this process to consider every aspect of benefits that you receive.

Comparing Medicare Advantage plans is notably more difficult. Recall from an earlier chapter, Medicare Advantage is an annual contract, which means the exercise of comparing “apples to apples” will change every year. It is practically impossible to believe that this situation will cease to exist. Why? The funds from the CMS change every year, and there are multiple competitors (carriers) trying to win more customers (you) every year.

Medigap vs. Medicare Advantage Revisited

Many say that it is very difficult to determine if Medigap or Medicare Advantage is superior. Earlier in this book, it is stated that the coverage of Medigap is superior due to the cost-sharing details are lower, and cannot be changed over time. We can use the information from this addenda in order to help comparing Medigap to Medicare Advantage.

Let’s say you have two Agreements, and you already know that the language of Agreement 1 will not change through time, but under Agreement 2, the other party can change the language. Let’s now compare the prices, and even if the benefits are identical, it should be clear that Agreement 1 is worth more than Agreement 2. In this simple example, Agreement 1 is Medigap, and Agreement 2 is Medicare Advantage.

Remember that you have the unrestricted right to change from Agreement 1 (Medigap) to Agreement 2 (Medicare Advantage), but not vice versa. That is because if you attempt to change from Medicare Advantage to Medigap, carriers can deny your application, and it is their sole discretion. Further, you will have to wait until the Annual Election Period, because you cannot cancel a Medicare Advantage plan to enroll in Medigap during the middle of the year (unless you qualify for a Special Enrollment Period, described earlier). In short, you can see that this option to change would mean that Agreement 1 should be more expensive than Agreement 2. A buyer should be willing to pay for the right to change between the two configurations, all else equal.

The stunning decision made by many: paying more for Agreement 2 when compared to Agreement 1. Nevertheless, this happens in many locations, where the most expensive Medicare Advantage plan is selected, instead of Medigap. As you can see by this Addenda, this configuration contradicts the common-sense reasoning used here.

Medicare Mail is About to Begin

Autumn is Busy, and September is Here

During the coming weeks Medicare beneficiaries will begin to receive a flurry of mail and advertisements. Here’s a quick guide to some of the mail that many will begin to receive.

Annual Notice of Change (ANOC)

Every year, both Medicare Advantage plans and standalone prescription Plan (Part D) beneficiaries will begin to receive an annual notice of change, a regulatory requirement mandated by the CMS. The ANOC will contain detailed information regarding coverage you have received in 2015, and will display how it will change in 2016. For example, the ANOC will display changes in premiums, deductibles, and copays, which may vary from year to year, depending on the services that you receive.

It cannot be overstated: beneficiaries should read these ANOCs when received. Too often, beneficiaries discard this document, and learn, after the fact, that their out-of-pocket costs change at a time they least expect. A very important feature about ALL Medicare Advantage and Medicare Part D plans is that they are annual contracts, these plans are approved by the CMS on an annual basis, and can be greatly affected by a large number of factors. Last (and not least), the carriers of Medicare Advantage Plans and Part D plans are actively competing against one another. The result is that the terms and conditions of your Medicare Advantage or Medicare Part D are likely to change. For Medigap policyholders, this is not an issue, because the terms and conditions do not change from year to year, other than the premium. By definition, Medigap plans are standardized (for example, Plan N from carrier #1 is identical to Plan N from carrier #2). In addition, they are guaranteed renewable, which means that the language will remain the same over time.

Extra Help for Prescriptions

The Extra Help program (which has also been known as the Low Income Subsidy), is administered by the federal government. For those that receive Medicaid, enrollment is automatic. However, for those that do not qualify for Medicaid, it is entirely different. For non-Medicaid recipients of Extra Help assistance, renewal is not guaranteed. The federal government may ask for you to verify certain financial data, in order to confirm your eligibility. You will be notified during the month of September. Again, this is a very important letter. In addition to receiving financial assistance towards premiums and copays, qualifying for the Extra Help program also automatically provides a Medicare beneficiary the ability to change Part D or Medicare Advantage plans throughout the year. Finally, if you qualify for the Extra Help program, and if you have a Medicare Advantage Prescription Drug (MAPD) plan, then the financial assistance can result in lower monthly premiums for your Medicare Advantage Prescription Drug plan. In other words, there are many implications to qualifying for the Extra Help program.