Declining discount of 3% on supplements actually equals 5% increase in premium

[TRL1111]

I was looking at the premium history for my AARP/UHC Plan G, which I've had for 3 years. I was surprised to see a 5% increase on my plan anniversary, because 3% was always in my head as the adjustment due to age that I agreed to when I signed up for the plan.

I put a pencil to it. The 3% is the amount the discount declines, which actually results in a 5% increase in premium the first time it's applied.

Here's the math.

For simplicity, let's assume the "community rated" premium is $100 a month; this is the number the discount is applied to. Let's also assume that $100 premium stays the same over time, which of course isn't the case because premiums are allowed to increase due to increasing costs of providing the plan's benefits (caused by plan utilization, inflation, etc.). But for these purposes, keeping it at $100 will help illustrate what happens.

I signed up for my plan when I was 65, at which time I was getting a 39% discount, resulting in a premium of $61. That discount stays at 39% for ages 65-68.  My premium went up during this time, but not due to my age--it went up because premiums increase to cover increased claims (as is the case with all supplements). 

At age 69, the discount is reduced by 3%, to 36%; this results in a premium of $64.  This IS due to my age, and is what I signed up for when I bought the plan.

That's an increase of $3, or 5% over my previous premium of $61.

This is not constant--it's only for the first time the discount goes down. The second time the discount goes down, at age 70, the new (lower) discount will be 33%, resulting in a new premium of $67. That's an additional $3 in premium, which represents an increase of 4.7% instead of 5% over the previous premium.

Fast forwarding to age 75, the premium at age 74 would be $79 (discount of 21%), and when I turn 75, the discount will go down to 18%, resulting in a premium of $82. That's an increase of 3.8%.

The increase due to the declining discount will start at 5% and will go down until a person reaches the age where the discount zeroes out (probably around age 81), and during that time the increase due to the declining discount will never be below 3%.

So that's how the declining discount on AARP/UHC plans affects premiums--a baked-in increase of 5% that will, over time, go down to 3%, at which time there will be no more increase due to age, but there will still be increases due to rising claims the supplement has to pay out.