Looking for a New Medigap Plan

It’s Medicare open season again, and that means many of you can consider changing your Medicare supplement insurance (Medigap) policy.

Shopping for a new policy is wise. It turns out that many people are overpaying. Medigap policies are issued by private insurers but are standardized by the federal government. Insurers can offer only up to 10 different types of policies, and the coverage is identical in each category. Yet, premiums for identical Medigap policies differ by as much as 100%, according to a recent study by CSG Actuarial. Some insurers have higher expenses than others, while others assume people won’t shop around.

Medigap policies are available only to those in traditional Medicare Parts A and B. Those in Medicare Advantage (Part C), you aren’t allowed to buy and don’t need Medigap.

It’s best to sign up for a Medigap policy when you first join traditional Medicare during your initial six-month open season. You’re guaranteed to be issued the policy you want, regardless of health, during that period and are guaranteed renewal for life even if your health deteriorates. But after that period, insurers are allowed to decline coverage because of your health. Also, you’ll owe a late enrollment penalty for the rest of your life when you first buy after your initial enrollment period. Details about the initial enrollment period and penalties are in last month’s visit.

A lot of expenses aren’t covered by traditional Medicare. Of course, there are the deductibles and copayments, but the largest potential expense is the 20% copayment. You owe 20% of every covered medical expense, regardless of how much that is. Expensive care such as an organ transplant or extended intensive care can be tens of thousands of dollars.

Also, many medical expenses aren’t covered at all. These include care while traveling outside the U.S., vision, dental, hearing, and a host of other types of care. There also are limits on coverage for some types of care.

To make shopping easier and to avoid scams that occurred in the past, the government standardized Medigap policies. The current types of policies that are allowed to be offered are summarized in the chart. None, even after combining with Medicare, covers all your potential medical expenses. But a Medigap policy does decrease uncertainty about potential expenses, making medical expenses less of a wildcard in your planning.

The trade off is that the more robust the coverage, the higher the premiums. Decide on the trade off you want between the amount of coverage and the premiums. Once you’ve narrowed down the policy or types of policies you want to consider, shop around.

Shopping is easier than for other medical insurance, because on Medicare’s web site you can compare all the policies of the same type available in your area. Of you can call 1-800-MEDICARE for help. Also, seek help from your state’s Area Agency on Aging. There also are financial planners or other advisers who make a specialty of helping people select their Medicare coverage.

Don’t buy a policy biggest it seems to be the best-seller in your area or that everyone you know seems to have. It might be the best policy, or perhaps the insurer is good at marketing or offers above-average commissions.

Don’t automatically go for the lowest initial premium. Some insurers offer low premiums because they are relatively new to the business or are trying to increase market share.

Finding an insurer who is likely to keep premiums reasonable after the first year means looking for a financially sound insurer that’s been issuing Medigap policies for a long time. The insurer also will have an average-to-low-cost structure and pay reasonable but not high commissions to induce agents to prefer its policies.

Though insurers are required to accept all applicants during their initial enrollment periods, they don’t have to afterwards. An insurer that continues to offer guaranteed-issue policies outside the initial enrollment period is likely to get stuck with less healthy policyholders over time and have to increase its premiums more than other insurers. You’re better off with an insurer that has a medical underwriting process for those applying after the initial enrollment period. It’s not a guarantee, but having that process makes it less likely the insurer will lose control of costs.

Ask how the insurer determines future premiums. Some use the “attained age” method. The premium is based on your age and will rise as you age. You know you’ll have steady premium increases over the years. Others use the “issue age” method. These policies also will have premium increases over time, but they’ll be based on health costs and the insurer’s costs, not on your age. The bottom line difference is attained age policies tend to have lower premiums when first purchased but issue age policies have lower annual increases and are likely to be less expensive years later.

Above all, shop around regularly, especially if you’ve maintained reasonably good health. Even if you’re happy with a policy, make sure the insurer still is competitive. Some insurers count on people not shopping around or switching policies much. Finally, don’t let a change in health stop you from seeking another policy. Underwriting standards differ among insurers, so you might find a better deal despite a medical problem.

RW October 2013.