REACHING AGE 65 is a financial relief for many folks—because they’re finally eligible for Medicare. But then disappointment often sets in.
Why? Medicare might cover just 80% of medical expenses, leaving the patient to handle the other 20%. How will you cover that 20%? The usual solution is to buy a Medigap policy. But there are so many choices that it can be overwhelming.
My goal today: Help you narrow that choice a little—by comparing two Medigap plans, along with Medicare Advantage. The latter is an alternative to the usual combination of Medicare Part A and Part B. Typically, Medicare Advantage plans are similar to an HMO, or health maintenance organization. Roughly a third of seniors are covered by Medicare Advantage, also known as Medicare Part C.
The federal government tries to simplify Medigap offerings by setting guidelines for 10 standardized plans, labeled A through N. The plans are then sold and administered by private companies. Standardized means there’s no difference in coverage between different companies. One insurer’s Plan A covers the identical expenses that any other company’s Plan A will cover. The only difference is the monthly price.
Instead of analyzing all 10 plans, we’ll look at the two most popular: Plan G and Plan N. Most of the other available plans aren’t nearly as popular (or, in the case of Plans F and C, they’re no longer offered to new 65-year-olds). Meanwhile, if you’re covered by Medicare Advantage, insurers aren’t allowed to sell you a Medigap policy.
Plan G has the highest monthly premium, but it also offers the most comprehensive coverage and involves the least hassle. On top of that Plan G premium, you’ll pay the monthly Medicare Part B premium charged by the federal government and you’ll have to meet a low annual Part B deductible, set at $198 in 2020. But leaving aside prescription drug charges and things like dental care, that should be pretty much it when it comes to medical costs. Plan G provides a high but known monthly expense, minimal paperwork and no unexpected annual expenses.
The other popular Medigap plan is Plan N. It has a lower monthly premium than Plan G, but it also comes with negatives. Like Plan G, Plan N doesn’t cover the annual Part B deductible of $198 and you’ll still have your monthly Medicare Part B premium. Instead, the primary difference is that Plan N has $20 to $50 copays and doesn’t cover “excess charges.” Those charges occur because providers can charge 15% more than what Medicare allows. That means Plan N involves more paperwork and potentially greater variation in annual medical expenses.
The third option is a Medicare Advantage plan. Many Advantage plans have no monthly premium, plus you don’t need—and can’t buy—a Medigap plan. Yes, you still have to pay for Medicare Part B, which is typically $144.60 a month in 2020, though it can be far more if you exceed certain income thresholds. Still, Medicare Advantage will have the lowest monthly premiums of the three choices we’re looking at.
What’s the downside of Medicare Advantage? If you have traditional Medicare plus a Medigap policy, you’re free to choose the doctors you want. No referrals are necessary. You’re covered anywhere in the U.S.
By contrast, with Medicare Advantage, your choice of medical providers is limited. You will also face out-of-pocket costs, which could be significant. To compensate, Advantage doesn’t just offer lower or zero premiums. Some routine services may be covered, such as vision, hearing and dental care, which aren’t covered by traditional Medicare. You may also receive prescription drug coverage—something that those on traditional Medicare have to pay extra for.
What’s my recommendation? If you can afford a Medigap plan, start with traditional Medicare plus Medigap. That’ll give you the most flexibility. If the premiums on the Medigap policy later become too expensive, you can always switch to Medicare Advantage.
The reverse, however, won’t necessarily be true. Why not? During the initial age 65 Medicare enrollment period, there’s no medical underwriting when you apply for a Medigap policy. But after that, there is—which means that, if you try to switch from Medicare Advantage to traditional Medicare plus a Medigap policy, you may not qualify for a Medigap policy.
On the other hand, if Medigap premiums are a concern from the start, you should probably opt for Medicare Advantage. What if you started out with traditional Medicare, but didn’t pick a Medigap plan during the initial age 65 enrollment period? If you later try to buy a Medigap policy but don’t qualify for health reasons, you can always opt for Medicare Advantage, where there’s no medical underwriting.
One final piece of advice: When making these choices, there’s no additional cost if you use an independent insurance broker. That broker will be your point of contact, rather than an 800 number. Find a broker who represents multiple companies, including those offering both Medigap and Advantage plans. Ask the broker to compare the G, N and Advantage plans on offer in your zip code.
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 Four Opportunities, Gifts That Give Back and Danger: Cliff Ahead.
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This is the kind of article I’d expect from an insurance salesman. If you have Medicare, the amount you pay is not related to what the Doctor Bills you. It is 20% of what Medicare approves. For example if your Doctor bills $1,000 but Medicare approves only $100, Medicare will pay only $80 and you will be responsible for only $20, NOT the $920 difference between the amount Medicare paid and the amount the Doctor billed.
Good review of a subject many people have no clue about. Two points to clarify though. The 115% excess charge only applies if the doctor does not accept Medicare assignment. Also when you mention possibly facing substantial OOP cost with MA are you referring to using out of network providers? Otherwise costs should be minimal or zero. Also, unlike traditional insurance Medicare has no OOP limit which Medigap adds.
James – nice article and great overview. My brother will be 65 in about 5 months. He is still working full time and intends to continue for some years. He asked me recently about a source of guidance for folks like him who will be eligible for Medicare and employer covered insurance at the same time. Any suggestions?
We are in that same situation as I am working until at least 70. When we ran the numbers, several years ago, traditional Medicare with a supplemental plan and part D cost less than my employer’s standard plan for myself and my wife. But if we both signed up for my employer’s Wellness activity and achieved platinum status our cost would have been slightly less than Medicare. That involved wearing fitness trackers and other creepy privacy invasions. So we declined my employer’s plan and did standard Medicare which also seems to provide more choice and less billing hassle. I suspect that many employers have been passing through most of the cost increases in their plans. It would be a good idea if this was required to be transparent. I have no idea what my employer’s costs actually are or what they pay for all of the services, like the Wellness management company, they add on.