Personal Finance

Don't ignore this gap when signing up for Medicare

Key Points
  • After the initial six-month period when you are guaranteed coverage by a Medigap policy, you generally will need to go through medical underwriting, which could result in paying more for a policy or being denied coverage.
  • Make sure you understand what each policy covers to make sure you choose wisely.

If you recently signed up for Medicare and are considering a supplemental policy to reduce what you shell out for health care, don't dilly-dally.

When you first enroll, you get six months to purchase what's known as a Medigap policy — which helps cover the cost of deductibles, copays and coinsurance associated with Medicare — without an insurance company nosing through your health history and deciding whether to insure you.

"The 'guaranteed-issue' period is the first six months,," said Elizabeth Gavino, founder of Lewin & Gavino in New York. "After that, it could be a nightmare."

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Basically, unless your state allows special exceptions, you have to go through medical underwriting after that six-month window. And, depending on your health, that process could cause the Medigap insurer to charge you more or deny coverage altogether.

While Medigap is no panacea to the rising cost of health care, about 13.1 million Medicare beneficiaries were using such policies to reduce their out-of-pocket outlays in 2016, according to the American Association for Medicare Supplement Insurance. That's about 22 percent of the estimated 58.4 million people on Medicare. Keep in mind this is different than a Medicare Advantage policy. More on that below.

If you are considering one of these policies, it's worth making sure you understand what you're buying. Beyond knowing the deadline for making a decision, here are some key considerations before you sign on the dotted line.

The basics

While a number of companies offer Medigap insurance, they can only offer policies from a list of about 10 standardized plans. Each is simply assigned a letter: A, B, C, D, F, G, K, L, M and N. Some states also offer a high-deductible version of Plan F.

This standardization means that, say, Plan A at one insurance company is the same as Plan A at another. Be aware, however, not every plan is available in all states.

Also, Medicare recipients under age 65 who are disabled might not have access to a Medigap plan, depending on where they live. Gavino recommends checking with your state's insurance department to find out if a plan is available.

The plans differ on what is covered. For instance, Plan F pays your Medicare deductibles while Plan A does not.

Or, some plans cover 100 percent of your deductibles and co-insurance, while others might only pay a portion of those costs. The Centers for Medicare and Medicaid Services has a chart on its website that shows the differences. You also can use the agency's search tool to find available plans in your ZIP code.

Additionally, Medigap policies can only be coupled only with original Medicare (Part A hospital coverage and Part B outpatient coverage). In other words, if you have a Medicare Advantage Plan (Part C), you cannot purchase a Medigap plan.

When it works

Overall, while about a third of Medicare recipients have an Advantage Plan and their ranks have been growing, some people discover that their favorite doctor or pharmacy is not part of an Advantage Plan's network and decide to remain on (or return to) original Medicare because their doctor accepts it.

Others, such as frequent travelers, want to avoid the limitations that sometimes come with Advantage Plans, such as requirements to visit in-network doctors or pay more if they are out of network.

Regardless of the reasons for remaining on original Medicare, it's important to understand its limitations.

For instance, Medicare has no out-of-pocket maximum. Additionally, Parts A and B come with deductibles and limitations on what services are covered and to what degree.

Part A hospital inpatient deductible and coinsurance
For 2018, you pay:
$1,340 deductible for each benefit period
Days 1-60: $0 coinsurance for each benefit period
Days 61-90: $335 coinsurance per day of each benefit period
Days 91 and beyond: $670 coinsurance per each "lifetime reserve day" after day 90 for each benefit period (up to 60 days over your lifetime)
Beyond lifetime reserve days: all costs

Part B deductible and coinsurance
$183 per year. After your deductible is met, you typically pay 20 percent of the Medicare-approved amount for most doctor services, outpatient therapy and medical equipment.

"If you're sick a lot, or in and out of doctor's offices, you can end up with some big bills," Gavino said.

That's where Medigap policies help. Yet they aren't a cure-all: For instance, Medicare does not cover dental and vision expenses, and Medigap policies do not pick up those costs. Advantage Plans, on the other hand, might offer coverage for both.

Additionally, many Advantage Plans include prescription drug coverage (Part D). If you are on original Medicare — whether you have a Medigap policy or not — you must sign up for a prescription plan unless you meet certain requirements.

Additionally, depending on a combination of factors — the policy's features, where you live, and sometimes your age — the cost can reach a few hundred dollars a month.

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The most popular Medigap plan (Plan F) cost an average of $159 to $236 for a 65-year-old male in 2016, according to the American Association for Medicare Supplement Insurance.

Your location alone can make that number vary wildy, however. In New York City, the highest cost of a Plan F premium was $444; and in San Jose, California, the lowest cost was $135.

Plans that offer less coverage are generally less expensive.

Premium differences

Where you might see differences between the same plans is in the monthly premiums. For instance, depending on where you live, several insurers could offer Plan F with different premium amounts.

Gavino recommends avoiding insurers that have little history in the marketplace yet offer the cheapest premiums.

"Some people will go for the cheapest option and then end up with a 20 percent to 30 percent increase the next year," she said.

Additionally, Gavino said, it's worth finding out whether the insurer you're considering will let you switch between plans.

Some people will go for the cheapest option and then end up with a 20 percent to 30 percent increase the next year.
Elizabeth Gavino
founder of Lewin & Gavino in New York

If your financial situation changes and you want to move to a less expensive policy, there's a chance the company will require you to go through medical underwriting before letting you switch.

Additional considerations

For people who end up switching from Advantage Plan back to original Medicare — which they can only do at certain times of the year — it's important to avoid making the move before considering whether Medigap will be part of your plan.

If you will need to undergo medical underwriting and are uncertain whether you'll get coverage, Gavino said you should remain on your Advantage plan until you know for sure.

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