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Managing Medicare's Costs

Healthy people can save money with less comprehensive Medigap plans

When people first enroll In Part A and Part B of Medicare, they have a one-time opportunity to purchase a Medigap policy without having to disclose pre-existing conditions. But this opportunity goes away after six months.

There are only four states where the six- month rule does not apply — Connecticut, Maine, Massachusetts, and New York. In the other 46 states, when people have health problems, even minor ones, they may be charged higher premiums if they try to get a Medigap policy after their first six months of enrollment in Part A and Part B. And if they have serious health issues, they will be denied coverage.

That’s why people in poor health who do not have employer retiree coverage will almost always get Medigap policies when they first enroll in Medicare – it may be their only chance. Those in good health, on the other hand, may enroll in Advantage plans to save money. And in so doing, they accept the risk — probably small — that they will not be able to get a Medigap policy later.

Except for their high costs, Medigap policies are the optimal coverage for older retirees who do not have employer plans. The most attractive feature of Medigap policies is that they do not have networks and are accepted by all Medicare providers. As people age, the flexibility in the choice of doctors and other providers can become increasingly important, with older retirees more likely to see several specialists.

In contrast to Medigap policies, Advantage plans have provider networks. And as people age and use more medical services, there may not be a plan network that includes all their doctors or that includes an advanced treatment center. But if people with Medigap policies develop serious illnesses and want to go to the Mayo Clinic, Johns Hopkins or other large state-of-the-art clinic, they will be covered.

While it’s true that Advantage PPO plans include some coverage for out-of-network services, patients’ costs may rise sharply when they go outside the network. Most Advantage PPO plans charge between 30% and 50% of the cost of out-of-network office visits and treatments. On top of that, many Advantage PPO have out-of-pocket limits as high as $10,000 when out-of-network services are included.

Another selling point for Medigap policies is that insurance companies do not make the coverage decisions. Instead Medicare, which has been compared to an overly permissive grandparent, determines whether a treatment or procedure will be covered. And if Medicare covers it, the Medigap policy is required to cover it, up to the policy limits.

With Advantage plans, though, insurance companies do make many coverage decisions. Although they are required to cover the same services as traditional Medicare, Advantage plans are more likely to restrict coverage in various ways, especially for expensive treatments.

The dilemma for many new retirees, then, is whether to get a high-priced Medigap policy or to enroll in an Advantage plan and assume the slight risk of not being able to switch to a Medigap policy later when they may need it.

A middle path for someone in good health is to get a less expensive, less comprehensive Medigap plan that nevertheless has good benefits. Of the ten Medigap plans, there are three that have substantially lower premiums and that cover all of Medicare’s services except for the Part A and Part B deductibles. The tradeoff is that these plans all have higher out-of-pocket risks than the comprehensive plans.

When comparing Medigap plans, it’s helpful to remember that Medicare is the first or primary payer and will cover most of the costs. The Medigap policy is secondary or supplemental coverage, and depending on the plan, will pay some or all of the remaining balance.

As an example, Medicare pays 80% of the cost for most medical treatments, and a Medigap plan pays for some or all of the 20% balance. Since Medicare picks up most of the tab, the risk in the less comprehensive plans is smaller than people may initially realize.

In the chart below these three plans are compared with the standard Plan F, which is the most expensive Medigap plan.

Medigap plan comparisons

Following are brief descriptions of the four Medigap plans shown in the chart:

Standard Plan F. This is the benchmark Medigap plan. It is the most comprehensive and expensive of the ten Medigap plans, covering all of Medicare’s gaps. A 65-year-old who gets this plan and lives to age 90 can expect to pay about $100,000 in Medigap premiums. That’s in addition to Part B premiums and Part D coverage. Yet despite its high cost, it is the most widely sold plan, with more than one-half of all Medigap policyholders owning it.

Even though Plan F does not have an out-of-pocket limit, its benefits are so sturdy that, in combination with Medicare’s underlying coverage, an OOP limit is rarely needed. Plan F (and Plan C) will no longer be sold beginning in 2020, although people who already have this plan at that time may continue to own it.

High-Deductible Plan F. This plan’s annual premiums are about one-half those of the standard Plan F. And after this plan’s $2,240 deductible has been met, its benefits are the same as those of the standard Plan F.

Again, with this and the other less comprehensive Medigap plans, it’s important to remember that Medicare pays most of the cost even before the plan’s deductible is satisfied. Thus for a $1,000 outpatient surgery, Medicare pays $800 and the policyholder pays $200 if the deductible has not been met. And if the deductible has been met, the surgery is fully covered.

Perhaps the biggest risk with this plan is that the policyholder will be hospitalized and have to pay all or a portion of the $1,340 Part A deductible unless the plan’s $2,240 deductible has already been paid.

Plan L. This plan’s annual premiums are roughly 30% less than those of standard Plan F. It has a $2,620 out-of-pocket limit, which includes all Medicare-covered services except for the $183 Part B deductible. Co-payments for Medicare-covered services are 5% of Medicare’s approved cost. The only exception is hospitalization, where someone with Plan L would pay $335, which is 25% of the $1,340 Part A deductible.

Plan K. This is the least comprehensive of the four plans in the chart. After paying the $183 Part B deductible, policyholders pay 10% of the cost for Part B services. If they are hospitalized, they will pay $670, which is one-half of the $1,340 Part A deductible. This plan’s $5,240 out-of-pocket limit applies to all Medicare-covered services after the $183 Part B deductible has been paid.

Finally, these three less expensive Medigap plans are not owned by many retirees. Moreover, relatively few companies sell them and even when they do, agents do not promote them due to their lower commission schedules. Plans K and L are owned by fewer by 2% of all Medigap policyholders, according to a report earlier this year from AHIP, an industry trade group.

People who choose one of the less comparable plans and later want to switch to a more comprehensive plan will likely have to answer health-related questions before they can upgrade The exceptions are the AARP/UnitedHealthcare Medigap policies, which in most states allow their current policyholders to upgrade without having to disclose pre-existing conditions.

But even if someone could not upgrade and had to remain in one of the less comprehensive plans, he or she would have better than average coverage as well as the flexibility to see any provider who accepts Medicare. ◊◊

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