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Managing Medicare's Costs

Ways to save money on Medigap policies (1 of 2)

A Medigap policy is the most expensive kind of Medicare supplemental coverage. If you enroll in a comprehensive Medigap plan when you turn 65, you’ll probably pay almost $100,000 in premiums if you live to be 90. And that does not include your Part B premiums, prescription drug costs, and outlays for services that Medicare does not cover.

Concerned about Medigap policies’ sizable costs, retirees have instead been choosing Medicare Advantage plans, most of which have low premiums. A decade ago, two million more people were enrolled in Medigap policies than in Advantage plans. But today seven million more people have Advantage plans than have Medigap policies.

To see how quickly Medigap policies have lost market share, compare their growth rates to those of Advantage plans. Medigap enrollment has increased at an average rate of 3.5% a year since 2011, or at about the same rate that Medicare’s total enrollment has grown.

But during that period Advantage plan enrollment grew almost 10% a year, and last month the Kaiser Family Foundation reported that one-third of all Medicare beneficiaries are enrolled in Advantage plans.

Still, despite their high costs Medigap policies have several things going for them, and in some cases they may be be your best options. They do not have networks, which means you can see virtually any doctor you want to. You can go to the Cleveland Clinic or to Johns Hopkins Medicine without wondering whether you will be covered. And if you see several doctors, you will have a much easier time of it with a Medigap policy than in an Advantage plan.

Another desirable feature of these policies is that Medicare and not an insurance company determines whether a medical service will be covered. That’s a good thing if you’re in need of an expensive or innovative treatment. Medicare is more lenient than insurance companies in approving medical services. Something as routine as getting a second opinion can occasionally be challenging in an Advantage plan, but Medicare almost always covers second and often third opinions. And when Medicare covers a medical service, Medigap insurers are required to do so also.

There are also times when your only logical choice will be a Medigap policy. If you live in a rural area, there may be only a few Advantage plans available, none of which meet your needs. Even if you live in a large metropolitan center, you might find that your doctors do not belong to any Advantage plan networks. Or that the one plan that does have all your doctors in its network also has a substandard quality rating from Medicare or else exorbitant costs for the prescription drugs that you take.

If you decide to get a Medigap policy, there are several ways that you may be able to keep your costs down. Here are some suggestions:

Choose a Medigap plan that matches your health needs.

There are 10 Medigap plans – 11 if you count the high-deductible version of Plan F as a separate plan. Their names are letters of the alphabet – Plan A, B, C, and so on through Plan N (Plans E, H, I, and J were discontinued in 2010). And there’s the high-deductible version of Plan F.

Throughout their retirement, people typically keep the Medigap policy that they choose they first enroll in Medicare. It’s only prudent, then, to give some thought to the plan you choose.

Four of the plans are very comprehensive and consequently expensive. Plan F is the most comprehensive of any Medigap plan, with Plan C being slightly less so. The only difference between the two is that Plan F covers excess charges by doctors who do not accept assignment. These two plans qualify as first-dollar coverage, i.e., you have complete coverage for all of Medicare’s gaps beginning with the first dollar.

Insurance agents often steer retirees to Plan F because it generates the highest commissions. According to a blog posting last February by the staff of the Medicare Payment Advisory Commission, more than 70% of all Medigap policyholders had either Plan F or Plan C during the most recent year surveyed. These two plans will no longer be sold beginning in 2020, although people who already have either of these plans at the start of 2020 may keep them.

Should you get one of these four comprehensive plans? The reason to buy insurance is to protect yourself from large losses. You’re almost certainly spending more than you need to when you buy insurance that pays for the small, predictable expenses that a comprehensive plan covers. That’s why financially savvy consumers do not get homeowners or auto insurance that has a zero deductible. They understand that the cost of eliminating the deductible outweighs the benefits.

There are two instances where people may reasonably choose to buy a comprehensive Medigap plan. One involves affluent individuals who are not overly concerned about cost. They may be willing to pay more in premiums in exchange for the convenience of never having to make a co-payment for a Medicare-covered service. The other are individuals who have serious chronic illnesses. Because they see their doctors frequently and often undergo continuing treatments, they might come out ahead financially.

Four other plans may not be comprehensive enough, particularly for people who go to their doctors frequently or who have health problems. Plans A, B, K, and the high-deductible version of Plan F all have sizable gaps in their coverage. Plans A and B, for instance, do not cover skilled nursing care, which can be a substantial risk for someone who has an extended stay in a skilled nursing facility. As for Plan K, it is the least comprehensive of any Medigap plan, with 50% co-insurance paymements for most Part B Services. And the high-deductible Plan F has a $2,200 deductible.

When you assess the risks in these plans, it’s important to understand that they are risks only for your supplemental payments. So when Plan K covers 50% of the cost of a treatment, that means the plan covers 50% of the amount that Medicare doesn’t cover. Therefore if Medicare covers 80% of the cost, Plan K will cover 50% of the remaining 20% balance, or 10%.

In any of these four plans, healthy individuals will likely save thousands of dollars over a period of many years. But they should understand that they are taking on more risk. In later retirement, they may be able to upgrade to a better plan, although they will probably have to answer questions about their health and in some cases could be denied coverage in a more comprehensive plan, i.e., they would be stuck in the higher-risk plan.

Three plans have moderate cost-sharing. Plans L, M, and N were introduced in 2010 and have slowly been gaining traction with retirees. Any of these plans is a solid choice for if you are in relatively good health. Their premiums can be 30% lower than those of Plan F, although there is a fair amount of pricing variation among companies. Even after making co-payments for some services and paying the Part B deductible, people who do not go to their doctors frequently will come out between $300 and $400 ahead for the year.

Retirees have been slowly migrating to the less comprehensive Medigap plans. Earlier this year a report by America’s Health Insurance Plans, an industry trade group, found that Plans G, K, and N had the highest percentage sales growth between 2014 and 2015. Sales of Plans G and K each increased by 28% and sales of Plan N grew by 27%. ◊◊

Next month’s blog discusses other ways that people may be able to save money if they decide to buy a Medigap policy.

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