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Mark Miller: Remaking Retirement

How to Evaluate Medigap Plans

Carefully choosing a supplemental insurance plan is key if you're enrolled in traditional Medicare.

When you sign up for Medicare, it's only natural to focus on your premiums as you make coverage decisions. But two other factors actually are more important: your access to care and the risk of high out-of-pocket costs.

And if you enroll in traditional Medicare, getting that out-of-pocket protection probably boils down to just one word: Medigap.

Traditional Medicare offers much more flexibility in how you access care when compared with Medicare Advantage plans, which typically use managed-care provider networks. However, Advantage plans come with a built-in cap on out-of-pocket costs--a feature that traditional Medicare lacks. Some traditional Medicare enrollees receive supplemental gap insurance as a retirement benefit from their former employers to cover some of those out-of-pocket costs. And low-income seniors get help from Medicaid. But for everyone else, it's important to understand the ins and outs of Medigap--when to buy it, the plan options, and how to go about selecting a plan.

When to Buy a Medigap Policy

In most states, the best time to buy a Medigap policy is when you first sign up for Medicare Part B. That's because Medicare forbids Medigap plans from rejecting you, or charging a higher premium, because of a pre-existing condition. This is referred to as "guaranteed issue," and the opportunity is available to you during your six-month Medigap Open Enrollment Period, which starts on the first day of the month in which you're 65 or older and enrolled in Medicare Part B.

During your guaranteed issue period, insurers must sell you a Medigap policy at the best available rate, regardless of your health status, and cannot deny you coverage. The premium will vary, depending on factors such as your age, gender, and where you live. A guaranteed issue right also prevents companies from imposing a waiting period for coverage of pre-existing conditions to begin.

You might also have a guaranteed issue right under certain other circumstances later on--for example, if you had employer supplemental coverage that is discontinued, or if you're enrolled in a Medigap plan that is discontinued. You have guaranteed issue rights if you joined an Advantage plan during your first year of Medicare but disenrolled from it within 12 months, too. Lastly, those who enroll in Medicare at an age younger than 65 because of a disability also get another guaranteed issue opportunity when they turn 65.

After your guaranteed issue period, Medigap plans in most states can reject applications or charge higher premiums because of pre-existing conditions, with the exception of four states that protect Medigap applicants beyond the guaranteed issue period: New York, Connecticut, Maine, and Massachusetts. And states that do have guaranteed issue rules still might have restrictions.

"You might still face a pre-existing condition waiting period in some states," cautions Frederic Riccardi, president of the Medicare Rights Center, which provides free counseling to enrollees. If in doubt, reach out to your state's department of insurance for guidance, he says.

Types of Medigap Plans

Medigap coverage levels vary by the policy type you purchase. Policies come in an alphabet soup of lettered plan choices, and shopping may seem like a complex task at first glance. Prices of the premiums will differ, but the benefits offered by plans are standardized across insurers, which makes it easier to compare plans based on the premium alone. The key differences are the percentage of coinsurance and deductibles picked up by different plan letters.

And the benefits are standardized across the United States. For example, all insurers offering Medigap Plan D in Ohio must offer the identical plan, and D plans in Ohio must offer the same level of coverage as D plans in California.

This table, created by the Medicare Rights Center, offers a detailed look at all the plan options.

One recent change in the plan choices has caused some confusion: The most comprehensive plan options--C and F--are being phased out. You can buy these plans if you became eligible for Medicare before Jan. 1, 2020, but for everyone else, D and G plans are nearly as comprehensive as C and F. They cover 100% of Part A coinsurance charges and hospital costs up to an additional 365 days after Medicare benefits are exhausted. These plans also cover 100% of Part B coinsurance or copayment amounts, hospice care coinsurance, skilled nursing facility coinsurance, and deductibles for Part A. 

The key difference is that D and G plans do not cover the Part B deductible ($233 in 2022). But even if you do qualify for a C or F plan, their premiums may be significantly higher than D and G plans, notes Bethany Cissell, account manager of the healthcare insurance services department at Allsup, a firm that provides fee-based assistance with Medicare plan selections. "In many situations it really comes down to comparing the premium for an F policy to see if it will outweigh that $233 I'd have to meet," she says.

What Medigap Plan Is Best?

When you're selecting a plan, the most important factors are deciding what level of coverage you want and how much you'll pay for it.

Start by contacting your State Health Insurance Assistance Program, or SHIP. These free counseling services are staffed by knowledgeable volunteers who can help you identify best-match coverage, and they can supply tables of all the current Medigap offerings where you live. You will find substantial variation in premiums for any given plan letter among carriers in your local market.

And keep an eye out for low come-on rates that could jump substantially in later years. It is wise to ask insurers for information about the history of premium hikes for your plan, but also consider the approach insurers use to determine premiums. One of these three approaches to pricing will be used by insurers, depending on the state where you live:

  • Attained age: This is the most common approach; the premium is based on your current age, but it will rise to reflect the higher amounts of healthcare you'll likely require as you age.
  • Issue-age rated (sometimes called "entry age rating"): Here, your premium will always be based on your age at the time you purchase the policy, but it can increase based on higher medical costs for the entire class of policyholders that you are part of.
  • Community rated (also called "no-age rated"): This approach requires insurers to charge the same rate for all policyholders, no matter their age. This rating system is less common, but it is very beneficial for buyers. It may require that you pay a somewhat higher price up front in exchange for more rate stability down the road. Connecticut, New York, and Massachusetts require the community rating (these states also offer continuous guaranteed issue for Medigap policies).

"After you choose the Medigap-lettered plan you want, you should understand how different insurance companies offering this plan calculate premiums," says Diane Archer, president of Just Care USA, an online service covering health and financial issues. "How the premium is calculated will affect the amount you pay over time."

One option for keeping down the cost of your premium is a high-deductible policy, which is available with some F and G plans. Premiums are much lower, but you are on the hook for $2,490 in out-of-pocket costs (in 2022) before coverage kicks in.

When you know what type of plan you want and have a short list of candidates, call each of the carriers, advises Cissell.

"Ask for their recent history on rate hikes, and whether they have discounts available," she says. For example, some carriers offer household discounts for couples who purchase coverage together.

"But I wouldn't necessarily go with the same carrier just for a spousal discount," she adds. "Medigap policy prices differ based on age and gender, so if I'm a man I'm typically going to be quoted at a higher rate than a woman of the same age and health profile."

How about picking a specific carrier? I hear from readers from time to time looking for a consumer rating service for Medigap carriers--but it doesn't exist.

Cissell notes that AM Best rates Medigap insurers for their ability to pay claims and suggests asking insurance companies for their own internal customer satisfaction rating information.

Other Types of Protection

Medigap isn't the only option for controlling out-of-pocket costs. In fact, just 21% of Medicare beneficiaries had a Medigap policy in 2018, according to the Kaiser Family Foundation. Another 18% had supplemental coverage as a retirement benefit from a former employer; 12% were covered by Medicaid; and 10% were in traditional Medicare but had no supplemental coverage (which, by the way, is not a good idea).

Meanwhile, 39% of Medicare beneficiaries were in Medicare Advantage. These plans often come with no additional premium beyond Part B, and they do have a built-in out-of-pocket cap. But that cap is considerably higher than you'd experience with a high-deductible Medigap policy --the average Advantage ceiling in 2021 was $5,091 for in-network services.

"It comes down to how you want to pay for your health insurance," says Cissell. "With a Medigap policy you're going to pay more up front, and a lot less out of pocket. So, your costs are relatively fixed. With Medicare Advantage, you have a very low premium or no additional premium at all, but you pay as you go."

Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to The New York Times and WealthManagement.com. He publishes a weekly newsletter on news and trends in the field at RetirementRevised. The views expressed in this column do not necessarily reflect the views of Morningstar.