As the first part of this article discussed, Medicare does a good job of providing seniors with coverage for basic health needs by covering a substantial percentage of the costs of medical care. However, Medicare doesn't cover everything, and what it doesn't cover can still cost seniors more than they can afford. Seniors on limited budgets can't afford the risk of having to cover even a small fraction of what can be huge medical costs. To meet the needs of these seniors, Medigap policies, offered by private insurance companies like Humana (NYSE: HUM ) provide various types of additional benefits that can protect seniors from costs that aren't covered by traditional Medicare.
Most insurance involves choosing among complicated options, and Medigap coverage is no exception. The alphabet soup of available Medigap plans looks intimidating at first glance. But once you start looking at the plan provisions themselves, you'll see that there are ways to simplify your analysis to make it easier to decide which plan will work best for you.
Expensive but comprehensive options
As you can imagine, having to dig through the 12 different Medigap plans that are available to most seniors to see which one is the most appropriate for your needs can be extremely frustrating. However, you can simplify matters by dividing the 12 types of policies into two broad categories. One category, which includes Plans A through J, gives seniors virtually complete coverage on the expenses that are specified by the given plan. Plans in this category have relatively higher premiums, but they have substantially reduced or eliminated co-payments, deductibles, and other out-of-pocket costs.
All policies in Plans A through J include certain benefits. These plans will pay the full amount of the co-payment on hospital stays longer than 60 days, which in 2007 is $248 per day up to 90 days and $496 for 60 days after that. In addition, these policies pay for up to 365 additional days over the course of your lifetime beyond what Medicare Part A pays. Also, these plans all pay the full amount of the 20% co-payment on doctors' visits and other medical services under Medicare Part B after you pay the annual deductible of $131.
Beyond those basic benefits, Plans A through J offer different combinations of additional benefits. Some plans pay the deductibles under Medicare Parts A and B. You can also obtain coverage that will pay the required co-payment if you need skilled nursing care for up to 100 days. With some plans, if a doctor charges you more than the Medicare-approved amount for medical care, the plan will cover some or all of the additional charge. You can also get coverage for some things that Medicare doesn't cover at all, including medical expenses you incur while traveling abroad, costs of recovering from an illness at home, and some preventive care. For a chart of exactly what combinations are available, you can look at page 20 of Medicare's guide to Medigap plans.
Cheaper but less comprehensive options
The most comprehensive Medigap plans remove almost all the financial risk that results from gaps in traditional Medicare coverage. However, many seniors may not believe that they need that much coverage, and the higher premiums for these plans may put them out of reach from a financial perspective. For those seeking less comprehensive coverage, there are a couple of Medigap plans, predictably called Plans K and L, that sometimes offer lower premiums.
The basic benefits that Plans K and L offer are largely similar to those you'll find in the more comprehensive plans. If you need to go to a hospital for treatment, the co-payment amounts are exactly the same for Plans K and L as they are with the other plans. They also offer the same additional 365 days of hospital care.
The big difference with Plans K and L, however, is in how they handle the costs of doctors' visits and other medical services covered under Medicare Part B. While more comprehensive plans pay the entire 20% co-payment that Medicare doesn't cover, Plans K and L only pay for a portion of that co-payment. Specifically, Plan K pays 50% of the co-payment, while Plan L pays 75% of the co-payment. What this means is that when you consider the entire cost of your medical care, Plan K will leave you paying for 10% of the cost on your own, Medicare will cover 80%, and Plan K will cover half of the remaining 20%, or 10%. Similarly, if you have Plan L, you'll pay 5% of your own medical costs. Plans K and L also have out-of-pocket maximums that put an upper limit on how much seniors have to pay. For Plan K, the maximum is $4,000 per year, while Plan L has a $2,000 annual maximum. Once you've paid that much, the Medigap policy covers 100% of the additional cost.
Furthermore, Plans K and L don't offer the additional benefits you can find with more comprehensive plans. If you want coverage for foreign travel emergencies or excess charges over the Medicare-approved amount, you'll have to choose from the more comprehensive plans. Nevertheless, Plans K and L provide a great deal of supplemental coverage that may be enough for seniors looking to reduce their premiums.
Knowing more about the various plan options is helpful in making a decision about which Medigap policy to choose. Yet while some plans cost less than others, does it really make a big enough difference to affect your decision? The third part of this article gives more concrete information about Medigap policy costs and then provides a framework for making a final decision about which Medigap policy is right for you.
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Fool contributor Dan Caplinger can only wish he had coverage as good as Medigap policies provide. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy is a lifelong commitment to you.
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