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Managing Medicare's Costs

Medigap Select policies: a seldom-used way to cut costs

Medigap Select policies are a modified type of Medigap coverage. They have benefits that are identical to those of other Medigap policies, but they restrict policyholders to a network of providers (emergencies are exceptions). Select policies are sometimes described as hybrids – part Medigap policy and part managed care plan. And they are available in approximately one-half of the states, with premiums 15% lower, on average, than regular Medigap premiums.

The most common type of Medigap Select policies are those that restrict hospital coverage to one or two hospitals. Imagine a city of 500,000 people where two prominent hospitals compete for market share. When people enrolled in Medicare are admitted to either of these hospitals, all of their costs are covered by Medicare except for an initial $1,132 hospital deductible (the 2011 amount). The hospitalized person’s secondary insurance usually covers most or all of this deductible.

An insurance company approaches one of the city’s hospitals and asks whether it would be willing to accept a lesser deductible, say $900, for patients that the insurance company sends to the hospital. The insurance company promises that in return for the discount, the hospital will have more admissions.

If the hospital agrees, the insurance company creates a Medigap Select policy with the requirement that except in emergencies, policyholders who need hospital care use the contracted hospital. Should policyholders choose to go to another hospital for a non-emergency procedure, they will be responsible for the $1,132 deductible. And since the insurance company will now pay a reduced amount for each admission to the hospital ($900 vs. $1,132), it can also lower the Select policy’s premiums.

Some retirees might choose to go to the contracted hospital in any event, so they now have a chance to trim their Medigap premiums. And a few retirees who would ordinarily choose the city’s other hospital might also be enticed by the lower premiums and buy the Medigap Select policy. They feel it is unlikely they will be hospitalized, but if they are they will be willing to use the contracted hospital, again with exceptions for emergencies. There are also a few Medigap Select policies that do not require policyholders to use a specific hospital, but that require them to use network physicians.

Occasionally retirees who own Medigap Select policies move out of the area, and so it no longer makes sense for them to be required to use an area hospital or provider network. Under Medicare’s rules, they have a guaranteed right to purchase a regular Medigap policy in the city or state they are moving to, and they cannot be charged higher premiums for the new policy because of pre-existing conditions.

Select policies can be issued for any Medigap plan level – A through N – although a majority of these policies are Plan C. If an insurance company sells its regular Plan C to 65-year-olds for $1,500 a year, they can save about $225 by purchasing a Medigap Select Plan C. And if they later want to convert from a Select plan to a regular Medigap policy, most insurers will allow them to make that switch without going through medical underwriting.

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