MEDICAL EXPENSES are a big worry for retirees—leading many to purchase supplemental insurance. But you need to think carefully about which Medigap policy you buy.
What does this insurance get you? Medicare Part B, which covers doctor’s visits and other outpatient care, typically only pays 80% of the expenses that retirees incur. To plug this and other coverage gaps, many folks buy a Medigap insurance plan. Want to keep your current doctors and not be restricted to the network of medical professionals offered in a Medicare Advantage plan, otherwise known as Medicare Part C? You’ll want to stick with Medicare Part B and supplement it with a Medigap insurance plan sold by a private insurer.
After signing up for Medicare Part B, most people have just six months during which they’re “guaranteed issue” for Medigap. “Guaranteed issue” means there’s no medical underwriting when choosing a Medigap plan. After those six months, you could be denied for health reasons. One potential pitfall: If you opt for a Part C Medicare Advantage plan when you’re first eligible for Medicare, you may forever be locked out of the Medigap market if you later want to switch out of Medicare Advantage. The reason: Your health may have deteriorated and you can’t pass the medical underwriting.
How do you decide which Medigap plan is best for you? There are 10 different varieties of Medigap plan. In 2018, Medigap Plan F was chosen by 54% of all enrollees. While Medigap plans are standardized in terms of the coverage they provide, costs can vary significantly. Even though Plan F is the most popular, Plan G is the fastest growing—for good reason. Plan G is less expensive than Plan F. The only difference between the two is that Plan F pays the Part B deductible of $185, whereas Plan G doesn’t—and yet, for that convenience, Plan F typically charges more than $185 extra.
In 2020, Medigap Plan F will no longer be offered to new Medicare enrollees. Result? Plan G is where most future enrollees will be going in 2020 and beyond—assuming they want comprehensive coverage. Those currently enrolled in Plan F might not be able to change to Plan G, because they’ll be subject to medical underwriting.
But if you can pass the medical underwriting, consider switching. Why? The premiums for Plan F will likely start rising relative to Plan G—for three reasons.
First, current Plan G enrollees are, on average, healthier. One indication: They’re less worried about the Part B deductible, because they don’t think they’ll have enough medical expenses to pay it in full. Second, since Plan F won’t get new enrollees in 2020 and beyond, the “book of business” will be aging and will likely be in worse health. Indeed, in 10 years, the youngest participant in Plan F will be 75 years old. Third, as premiums continue to rise for Plan F, those healthy enough to pass the medical underwriting will switch to Plan G, further exacerbating the health disparity between the two groups.
What if you’re among those last few enrollees in 2019 who can choose Plan F? I can’t think of any reason to pick it over Plan G. Hoping to switch from F to G? It’s important to call an independent broker, who represents multiple insurance companies, including those offering both Medical Advantage plans and Medigap policies. Before you drop your current policy, make absolutely sure you can get on a new plan—and do so at a reasonable cost.
James McGlynn CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. His previous articles include Late Fee, Where to Begin and As the Years Go By.