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Should You Get a Medigap Plan?

By Dan Caplinger - May 30, 2016 at 10:02AM

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Many people don't realize the value of supplemental coverage on top of Medicare.

Millions of Americans rely on Medicare to help them with their basic healthcare needs in retirement. Yet Medicare doesn't cover everything, and even when it does cover a certain service, it often doesn't pay for 100% of its costs. As a result, many Medicare participants look to get supplemental insurance coverage in the form of a Medigap plan in order to help protect their finances from unexpected healthcare costs. Below, we'll look at why Medigap plans can be useful and whether you should consider one for your situation.

What Medigap plans do

Medigap policies, also known as Medicare Supplement Insurance, can help pay some of the healthcare costs that original Medicare doesn't cover. These expenses include copayments, coinsurance, and deductibles under Medicare. Private companies sell Medigap policies, and typically, they'll step in to pay whatever share of your overall costs the policies call for after Medicare pays its approved amount for the services you need.

In order to get a Medigap policy, you must have Medicare coverage under Parts A and B of the program. The Medigap policy comes with an additional monthly premium that you pay on top of your regular Part B premium amount.

It's important to understand that even Medigap policies don't fill in all of the gaps in Medicare coverage. For instance, they generally don't cover long-term care, vision or dental services, hearing aids, eyeglasses, or private-duty nursing services.

How to compare Medigap policies

One interesting aspect of Medigap is that its policies are standardized by the government. Insurance companies are only allowed to sell you plans with certain characteristics. For people in most parts of the country, 10 different types of Medigap plans are available, each identified by a letter. Each plan offers different combinations of covered services, and you can pick and choose depending on your particular needs. You can get further details on each of the 10 plans at the Medicare website on Medigap plans.

For example, Medigap Plan F offers particularly comprehensive coverage that includes hospital costs and coinsurance payments for up to a full year after regular Medicare benefits are used up. It also pays the 20% coinsurance on Part B medical costs that Medicare doesn't pay, and it pays various deductibles, coinsurance, and copayments on most other aspects of Medicare. By contrast, Plan K pays only 50% of the amount of Part B coinsurance and copayments, Part A hospice care, skilled nursing facility coinsurance, and Part A deductibles that traditional Medicare doesn't cover. In practical terms, this leaves most participants paying 10% of the cost of their Part B expenses, representing half of the 20% that Medicare doesn't pay. An out-of-pocket limit of $4,960 applies to limit the potential risk for those who choose the less comprehensive option.

As you'd expect, more comprehensive coverage typically comes with larger premiums, but you'll incur fewer out-of-pocket costs when you need healthcare services. Less comprehensive coverage can save you money in monthly costs, but at the potential expense of more out-of-pocket costs later on.

Do you need a Medigap plan?

One of the most surprising aspects of traditional Medicare for many seniors is that it doesn't have an inherent out-of-pocket maximum. Obtaining a Medigap plan gives you the financial peace of mind of knowing that no matter what happens to you with your health, there will be an upper limit on how much of your own money you have to spend.

That said, many Medicare participants have turned to Medicare Advantage plans under Part C of the program to get similar benefits. Medigap plans aren't compatible with Medicare Advantage, largely because Medicare Advantage plans already incorporate the types of supplemental coverage that Medigap plans provide. However, for some people, a Medicare Advantage plan will better allow them to tailor their healthcare needs to the overall coverage that they want, whether it's for hospital, medical, or prescription drug costs.

Medicare covers a huge portion of the costs of healthcare for older Americans, but it isn't entirely comprehensive. In order to close the gap between what Medicare covers and what you owe, a Medigap policy can be essential in order to protect your assets from the risk of an unforeseen health problem. If you prefer to stick with traditional Medicare to cover the bulk of your costs, looking at Medigap policies more closely is a smart move.

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