The ABCs of Filling Medicare Gaps

EDITOR'S NOTE: This article was originally published in the July 2008 issue of Kiplinger's Retirement Report. To subscribe, click here.

If you're nearing 65, chances are you'll be applying for Medicare coverage. But be aware that you'll be on the hook for the costs of deductibles, co-payments and other out-of-pocket expenses that the federal health-care program doesn't cover. If you're opting for traditional Medicare, you'll want to consider supplemental insurance, known as Medigap, which fills in the program's huge coverage holes.

Medigap policies, which are sold by private health insurers, come in 12 standardized benefit packages, labeled A through L. The coverage and the price generally increase as you move up the alphabet. Deciding on a policy can be tricky. "Do your homework, even though it can be complicated," says Melissa Gannon, a vice-president of insurance and banking ratings for TheStreet.com Ratings. "It really pays off."

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Plan A is the most basic package. It covers Medicare's co-insurance for hospital stays longer than 60 days, as well as the 20% co-payments for Medicare Part B outpatient services. Plans K and L are high-deductible policies that carry lower premiums but higher out-of-pocket costs.

The most popular package is Plan F, which strikes a good balance between costs and coverage. It covers the basic benefits plus Medicare's $1,024 hospital deductible, the $135 Part B deductible and some skilled nursing home costs. (Massachusetts, Minnesota and Wisconsin have their own plans.)

How to Pick a Plan

To choose a policy, consider your health status and family medical history. The differences among some plans can be small. For instance, Plan F covers the Part B deductible, but doesn't cover at-home recovery, while Plan G covers the opposite. If you can afford the deductible and would rather cover at-home costs not covered by Medicare, you're better off with Plan G. Meanwhile, the high-deductible Plans K and L are best suited for healthier beneficiaries.

Once you settle on a plan category, shop for the cheapest policy. You'll get the best Medigap price if you sign up within six months after enrolling in Medicare Part B. During this open-enrollment period, an insurer cannot refuse to sell you a policy or charge you more because of medical issues.

Although each policy with the same letter offers the same coverage, prices can differ significantly, says Gannon. For Plan F, for instance, the median price for a 65-year-old male was $1,880 in 2007, but ranged from $788 to nearly $12,000.

The cost can also depend on the insurer's pricing method. With attained-age policies, premiums start low but rise every year. Issue-age policies lock in your premium when you first buy; premiums often are initially higher compared with attained-age policies but may be cheaper in the long run. With community-rate pricing, everyone in an area is charged the same premium regardless of age. Attained-age policies are the most popular because buyers like the low initial rate.

To get an idea of your long-term costs, ask for a three- to five-year rate history for each policy you're considering. Also ask for quotes that assume you are five, ten and 15 years older. Note that premiums on all policies can rise annually because of inflation.

Medigap plans no longer offer drug coverage, so consider buying a separate Medicare Part D drug plan. You don't need Medigap or Part D if you enroll in a Medicare Advantage plan, which offers Medicare benefits and varying levels of gap and drug coverage.

Advantage beneficiaries typically are limited to a specific provider network, and some plans may pay less than traditional Medicare for some services, such as hospital stays. Also, Medicare Advantage plans operate on one-year contracts, while an insurer cannot terminate your Medigap coverage.

To compare policies, use the Medicare Options Compare Tool at www.medicare.gov/mppf. If you need further help, call Medicare at 800-633-4227 or contact your State Health Insurance Assistance Program (www.shiptalk.org).

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