What is Medigap and How Does it Work?

MedicareHealthcare

May 13

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While new retirees often encounter many surprises during this time of their lives, one of the most common is looming Medicare coverage gaps. Expenses such as high deductibles for hospitalization or extended time in a skilled nursing facility post-surgery are just some of many examples of the same.

This is precisely where Medicare Supplement plans (also known as Medigap policies) come into play, covering many out-of-pocket costs Original Medicare doesn’t cover such as copayments, coinsurance, and deductibles. Let’s explore these plans in more detail…

The four parts of Medicare

Before we discuss Medigap policy details, it’s helpful to have at least a broad understanding of how exactly Medicare works.

Our country’s Medicare program consists of four parts (A, B, C, and D), each covering specific services. Known as “Original Medicare,” Medicare Part A and Part B dictate the government pay providers directly for patient services received: including care in a hospital or skilled nursing facility, in-home hospice, and limited home healthcare services (Part A) as well as medical services and supplies necessary to treat health conditions (with the latter including visits to doctors and other healthcare providers, medical equipment, and ambulance services (Part B)). Almost all physicians and hospitals in the United States accept Original Medicare.

As an alternative to Original Medicare, Medicare Part C consists of bundled plans offered by private companies pre-approved by Medicare (known as Medicare Advantage plans). Most Part C plans include the same coverage provided by Parts A and B and also often loop in optional vision, dental, hearing, and prescription drug coverage and additional services including transportation to doctor’s visits—none of which are covered by Original Medicare.

Medicare Part D, also administered by Medicare-approved private insurance companies, helps cover both brand-name/generic drug costs and can be added as a stand-alone service or via many Medicare Advantage plans.

How Medigap policies work

Medigap policies are standardized as required by the federal government regardless of which insurance company sells them, meaning companies can only offer policies from a list of about ten standardized plans each denoted by a letter: A, B, C, D, F, G, K, L, M, and N. It also means a Medigap plan with a given letter will offer the exact same benefits no matter where you buy the policy from with the exception of Massachusetts, Minnesota, and Wisconsin (which standardize their plans in a different way). The only difference between plans boasting the same letter is price, which we’ll discuss momentarily.

Benefits of purchasing a Medigap policy

There are several good reasons to buy a Medicare supplement policy, but the most common is the ability to reduce—or even eliminate—most out-of-pocket costs associated with Original Medicare.

For example, Part A includes a $1,632 deductible for in-hospital stays per visit. If your hospital stay extends beyond 60 days, you are required to pay a portion of daily expenses. Depending on the Medigap plan, a portion (or sometimes all) of these expenses is covered.

The annual Part B deductible is currently $240, meaning patients typically pay 20% of the Medicare-approved amount for most physician services, outpatient therapy, and durable medical equipment after this sum is fulfilled. The Medigap plan selected determines precise coverage.

Another reason to own a Medigap policy involves foreign travel. While Original Medicare doesn’t cover medical care beyond U.S. borders, a Medigap policy can help travelers in such situations (note that each plan includes a separate deductible for global travel).

While neither Medicare nor Medigap cover long-term care, the latter does afford policyholders additional time in skilled nursing facilities or for hospital stays/hospice care (in comparison to Original Medicare).

Average Medigap policy costs

Several factors determine Medigap plan costs including where you live, the type of plan you enroll in, and the company selling the plan. That said, insurance companies determine costs based on three primary rating methods:

A “community rating” method means premiums are generally priced so that everyone who purchases the same plan pays the same premium: which increases over time but not due to age.

An “issue-age rating” method simply means premiums are based on your age when you buy the policy (with premiums increasing over time but not due to age, akin to community ratings).

Finally, most Medigap plans rely on “attained age” ratings based on your current age and becoming more expensive as you get older.

Regardless of which company you go with, it’s helpful to know which rating system is used as these insights will help you make a well-informed decision.

Currently, Plan G is one of the more popular (based on enrollment data) and comprehensive plans available. According to the Medicare website, a non-smoking 65-year-old male in Ridgewood, New Jersey would pay anywhere from $154 to $484 monthly for Medigap Plan G. A non-smoking female with a similar profile, meanwhile, would pay a little less—with monthly premiums ranging from $138 to $422.

While price is of course important, never choose a carrier based solely on premiums. The carrier’s rating claims history, average rate increases, and financial ratings—as well as customer service reviews—should also play a role in your decision. Click here to kickstart your Medigap policy research.

How to qualify for Medigap

You must enroll in Original Medicare (Parts A and B) to obtain a Medigap policy. While the initial Medigap open enrollment window is six months long (as soon as your Medicare Part B plan goes into effect), it is still possible to purchase a Medigap policy at a later time.

When to enroll in a Medigap policy

If you decide a Medigap policy is right for you, be sure to enroll no more than six months after doing so for Medicare Part B. There are a few reasons why…

First and foremost, insurers offering Medigap policies cannot deny you coverage or charge you more for preexisting conditions when you first enroll within the six-month window. After this time period, insurance companies will often require you endure medical underwriting that may lead to higher costs or—even worse—deny you coverage altogether. Specifics do vary from state to state so be sure to do your homework.

Beyond this, adding a Medigap policy outside of your initial enrollment period may also cost you more as some insurers base a portion of their rate on your age when you purchase the policy (meaning younger people may pay less).

Other Medigap policy purchase considerations

Medigap policies only cover one person, so if you’re married, your spouse must purchase a separate policy.

If you have a Medicare Advantage plan, Medigap coverage isn’t available. In fact, it’s illegal for someone to sell you a Medigap policy if he or she knows you’re enrolled in a Medicare Advantage Plan (unless you’re switching back to Original Medicare).

Finally, a standardized Medigap policy is guaranteed renewable (provided you continue to pay the premium) even if you suddenly encounter health issues at any point along the way.

In sum: Medicare Supplement plans

As Original Medicare coverage gaps are substantial, a Medigap policy sometimes makes sense for many people who are eligible. While not everyone can afford the most comprehensive options, several choices allow even those on a limited budget to obtain additional coverage. We recommend speaking with a Medicare expert or certified financial planner to better navigate the complexities of Medicare and help determine if a Medigap policy is right for you.

Still have questions about Medigap? Schedule a FREE Discovery call with one of our CFP® professionals.

FAQs

Based on recent AHIP enrollment data, the most popular plans are currently F, G, and N. Forty-one percent (41%) of all Medigap beneficiaries are enrolled in Plan F, 32% are enrolled in Plan G, and 10% are enrolled in Plan N. Remember, however, that just because these plans are deemed “popular” doesn’t mean they’re 100% right for you.
If you buy a Medigap policy during your 6-month Medigap open enrollment period and decide you don’t like the policy within this timeframe, you can in fact switch to a different Medigap policy.
After obtaining your new Medigap policy, you have 30 days to decide if you want to keep it (referred to as a “30-day free look period”). If you opt for this route, be sure not to cancel your first Medigap policy until you’ve decided to keep your second option; you’ll therefore need to pay both premiums for one month.
Should you decide to switch after the 6-month period but before your next open enrollment period, in most cases, you cannot change your Medigap policy unless you have what’s called a “guaranteed issue right” or “Medigap protection.” This typically occurs when your policy changes (e.g., you’ve received notification that your Medigap plan provider is withdrawing from your area).
Alternatively, you can wait until your next open enrollment period (often between October 15 and December 7 each year) to change policies.
Keep in mind that when you change plans, any new insurance company is allowed to underwrite your application—meaning they can deny you coverage or charge you a higher premium.
Any physician or facility that accepts Medicare also accepts Medicare Supplement insurance; so as long as your provider accepts Medicare, your Medigap plan will also be accepted.
Check with your Medigap provider to make sure, but your plan will typically travel with you even if it isn’t sold in your new state.