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Managing Medicare's Costs

Four questions to ask yourself before you buy a Medigap policy

When you turn 65, all it takes is a phone call to buy a Medigap policy and get excellent coverage with no questions asked. You don’t have to worry about whether your doctors are in a network because you will be covered when you see any physician who accepts Medicare. And if you buy a policy during the first six months you’re enrolled in Medicare, you won’t need to answer questions about your health.

In fact, it may be too easy to buy these policies. Attracted by their simple enrollment process and comprehensive benefits, you may fail to take into account how much these policies will cost you in the long run. If you are a 65-year-old who will live another 25 years, you could easily pay $100,000 in Medigap premiums, depending on the state you live in. That’s on top of $40,000 in Part B premiums and $30,000 or more that you’ll fork over for Part D coverage. Suddenly your projected 25-year costs have soared to $170,000, and even that eye-popping amount doesn’t include dental and vision benefits and other services not covered by Medicare.

One reason Medigap coverage is so expensive is that, unlike Advantage plans and most employer supplements, it does not receive government subsidies. Another reason is that the most popular Medigap plans are too comprehensive to be cost-effective. Which brings us to four questions you should ask yourself before you purchase one of these policies.

1) Why would you overpay by buying a comprehensive Medigap plan? Most people don’t realize how much they will spend for one of these almost-everything-is-covered plans. There are 10 Medigap plans, each designated by a letter of the alphabet (A through N) and each has its own benefit design. The four comprehensive plans — C, D, F, and G — account for more than 60% of all Medigap sales according to a Kaiser Family Foundation study last year. Plan F — the priciest choice because it covers every Medicare gap – represents 40% of all policies sold. If you ask an insurance agent to recommend a plan, he or she will almost always suggest Plan F, possibly because it generates the highest commissions.

When you take an insurance class, you learn on the first day that the purpose of insurance is to protect you from large, infrequent losses. But if you want to cover routine small costs, your premiums will double or triple. Comprehensive Medigap plans fully cover predictable expenses like $20 co-payments for doctor’s office visits. There’s also some evidence that people in poor health flock to comprehensive Medigap policies, which means premiums must be high enough to cover these minor expenses for people who have numerous doctors office visits and treatments. Then there’s an an added 15% or greater markup for overhead and profits.

You might consider a plan that is not as comprehensive, especially if your health is good. Plans N and L are solid choices, and in most cases they will save you between $200 and $400 a year, depending on the state where you live and how many times you go to the doctor. Over a span of 20 or 25 years, those savings can add up to between $5,000 to $10,000.

Is there ever a valid reason to buy a comprehensive Medigap plan? Perhaps if you have a serious chronic disease, go to your doctors often, and undergo frequent expensive tests and treatments, then it could make financial sense. But at age 65 you may not know whether that will ever be the case and it’s too expensive to purchase a comprehensive plan in anticipation of something that may never happen. And if you buy a less comprehensive plan, you should do no worse than break even if you eventually have a serious illness.

Another commonly cited reason for getting a comprehensive policy is that you are relatively affluent and do not mind paying extra for the convenience of rarely having any cost-sharing or a billing dispute. If that’s your situation and you understand the tradeoff you’re making, then you can decide to buy a comprehensive policy with a clear conscience.

2) Do you know your state’s Medigap rules? Policy benefits are identical in 47 states, but underwriting and pricing rules vary (Massachusetts, Minnesota, and Wisconsin have their own standardized plans). Knowing the rules in your state can sometimes save you money.

California, Maine, Missouri, Oregon and Washington, for example, have special rules that allow you during a limited period each year to change to a different Medigap insurance company without answering health questions. Let’s say that one year your Medigap premiums jump by 8% and you see from your state’s online Medigap premium comparisons that another insurance company sells the same plan to someone your age for $50 less a month ($600 less a year) than you now pay. In these five states, you can change to the lower-premium insurer without answering health questions during the limited time window each year.

There are also four states that require Medigap policies to be community rated and to be sold on what’s called a full guaranteed issue bais. In combination those two consumer protections allow you to buy a policy at any time without answering health questions. You can choose when to upgrade your current plan, to switch to a different insurance company, or to drop your Medicare Advantage plan during annual open enrollment in order to change to a Medigap policy.

This flexibility comes at a price, however, because these states –Connecticut, Massachusetts, New York, and Vermont – cannot charge higher premiums to incoming policyholders who are perhaps in their 70s and 80s and have health problems. Since unhealthy people cannot be charged more regardless of the age at which they enroll, that means healthy individuals pay higher premiums than would otherwise be the case. In these states it makes even more sense to start out with a less comprehensive Medigap policy or an Advantage plan. Later if you decide to upgrade, you can easily do so.

3) Do you know about Medicare Select plans? They are Medigap policies that have lower premiums but the same benefits so long as you remain in the plan’s network. In some respects they are similar to PPO plans in which you can save money if you don’t go outside the PPO network. In many states, Medicare Select policies’ only requirement is that you use the plan’s preferred hospital unless it’s an emergency. If it’s a hospital you would choose in any case, you can save money without giving up anything you want.

Some Medicare Select policies require that you use network doctors but not necessarily a particular hospital. Blue Cross Blue Shield of Arizona, for instance, sells a Medigap Select Plan C that has the same benefits as Medigap Plan F so long as you stay within the plan’s network of more than 15,000 providers. Because you don’t need referrals, you can decide on your own which network physicians you want to see and when. Your annual premiums are $636 lower than if you chose a standard Plan F sold by Blue Cross Blue Shield of Arizona, according to Arizona’s 2015 Medigap premium comparisons.

What if you want to see a specialist who is not in the Select plan’s network? Medicare will continue to pay its usual 80% and you will pay the remaining 20% out-of-pocket.

4) Do you want your Medigap policy to have the extra protection of an out-of-pocket limit? Only two Medigap plans – K and L – have out-of-pocket limits. That’s usually not a concern, since all Medigap policies except Plan A and Plan B have excellent catastrophic coverage. Both Plan A and Plan B have a huge $12,600 gap for days 21-100 in a skilled nursing facility.

With the exception of Plans A and B, there probably aren’t too many situations where as a Medigap policyholder you would benefit from an out-of-pocket limit. Still, if you want an extra layer of protection while also keeping premiums reasonable, Plans K and L are your only Medigap options. Plan K has very low premiums, a high $4,940 out-of-pocket limit, and is rarely sold. Plan L on the other hand has a low $2,470 out-of-pocket limit, which applies to those medical services that the plan covers. The only Medicare-covered costs that Plan L’s out-of-pocket limit does not include are the $147 Part B annual deductible and excess provider charges from doctors who do not accept Medicare assignment. Premiums do not count toward the out-of-pocket limit. ◊◊

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