Dear Clients and Friends of Cornerstone:
Selecting Medicare and Medigap plans – whether for ourselves or when assisting a parent or other loved one with the decision – is a complex task given the number of options available. This month’s article explains how Medicare and Medigap work in relation to each other, and what alternatives each plan offers. As some plans are being phased out and new options added, we think you will find this information valuable as you consider your choices to close the Medicare gap.
If you would like to refer back to any previous newsletters we have published, you can find them on our website. Please be sure to visit www.ccadvisors.com.
– Cornerstone Capital Advisors
CLOSING YOUR MEDICARE GAPS
Rail systems around the world warn you to “mind the gap” when boarding a train. It’s good advice for your Medicare coverage, too.
Medicare is comprehensive, but it doesn’t cover everything. There are copays, deductibles, and limits on hospitalization benefits. If you enroll in Medicare Advantage–the all-in-one managed care alternative to traditional Medicare–your out-of-pocket costs are capped. But if you elect traditional Medicare, you’ll probably want to buy a Medigap supplemental policy to close some or all of your gaps. Nearly 1 in 4 Medicare enrollees have a Medigap policy, according to the Kaiser Family Foundation.
What does Medigap cover, when should you buy it, and how much coverage do you need? Read on.
What Is Medigap?
The coverage level varies by the policy type you purchase. Policies come in an alphabet soup of lettered plan choices, currently including A, B, C D, F, G, K, L, M, and N. The most popular–accounting for more than half of all policies sold–are plans C and F, which are the most comprehensive.
By law, the benefits offered by Medigap plans must be uniform across the country. That is, a C plan in Ohio must offer the same benefit features as a C plan in California. Premium prices for the same plan, however, can vary quite a bit from state to state, and even from carrier to carrier within a local market.
Medigap offers the peace of mind that comes with making your healthcare expenditures more predictable. This year, for example, the Part A deductible is $1,316 and the daily coinsurance charge for longer hospital stays (61 to 90 days) is $329. In the unlikely event of a very long hospital stay, Medicare stops paying after 90 days, and after you exhaust a lifetime reserve of 60 days. The Part B deductible this year is $183.
What Does Medigap Cover?
Two plans–F and G–cover what Medicare refers to as Part B excess charges. Medicare sets standard rates for all procedures that participating physicians must accept, but they also can be classified as “nonaccepting,” which means they can add surcharges to the patient beyond Medicare rates. Medigap coverage for excess charges meets these costs; starting in 2020, G plans will be your only option for buying this coverage.
Federal legislation passed in 2015 phases out Medigap C and F plans–also known as “first dollar” coverage–for new buyers beginning in 2020, although current policyholders can keep their plans. The idea here is intended to save money for Medicare by reducing unnecessary utilization of healthcare by giving enrollees more “skin in the game.”
The phase-out of new C and F sales could also lead to hefty premium increases for current policyholders, since there would be fewer younger enrollees to keep the risk pool in balance.
Starting in 2020, D and G plans will be the new most comprehensive plans.
“C becomes D, and F becomes G minus the Part B deductible coverage,” says Aaron Tidball, manager of Medicare operations for Allsup, a firm that offers a fee-based service that helps people find good-fit plans.
Tidball notes that some insurers already are steering new customers to D and G plans, and may try to entice existing C and F policyholders to move over with one-time incentive offers.
When To Buy
During Medigap Open Enrollment–also referred to as the guaranteed issue period–insurers cannot use medical underwriting to refuse to sell you a policy. Insurers also can’t charge you more for a policy due to any pre-existing conditions.
“Once that six-month period is over, insurers don’t have to sell to you at all, and if they do, they can charge you whatever they want–hundreds, even thousands more dollars annually,’ says Tidball.
The open enrollment feature makes the initial choice between traditional Medicare and Medicare Advantage especially important.
Let’s say you choose an Advantage plan when you are first eligible for Medicare at age 65, but later want to switch into traditional Medicare with a Medigap policy. If you switch during your first year of Advantage enrollment, you get the benefits of guaranteed issue.
‘But it needs to be during the first year, and only with your first Advantage plan,” notes Tidball. “If you’ve switched into a second Advantage plan and then decide you want to switch to traditional Medicare, there’s no guaranteed issue benefit.”
Also, if you dropped a Medigap policy to join a Medicare Advantage plan for the first time and you want to switch back, then you have a full year trial right to decide.
How Policies Are Priced
Membership organizations often offer discounts on policies–check your professional and social organizations, as well as groups like AARP. Insurers sometimes will make special offers to a community or to households for joint spousal purchases.
Additionally, while “first dollar” coverage is the most popular option, you can save on premiums by selecting a less comprehensive option.
“A lot of people like plan N–the coverage is similar to C and F but it is less expensive because it includes co-pays for doctor visits and emergency rooms,” says Tidball.
Be on the lookout for low come-on rates that could jump substantially in later years. Tidball advises buyers to consider an insurer’s history on premium hikes, but also the rating system used by the insurer to determine prices.
Insurers can use one of three rating systems:
If you live in New York, Massachusetts, or Connecticut, congratulations, you have hit the Medigap jackpot. These three states have continuous guaranteed issue and all plans use community rating.
One final note: Medigap plans are sold and regulated by states. If you move to a different state after buying a policy, there is no guaranteed issue right, but carriers often will transition you to a local version of the same letter policy, possibly with a price increase.
Mark Miller is a retirement columnist and author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living.