Medicare supplement plan

What Is Medicare Supplement Plan?

A Medicare supplement plan, also known as Medigap, is a type of private health insurance policy that helps cover some of the healthcare costs that Original Medicare does not. These plans fall under the broader category of personal finance, specifically within healthcare planning for seniors. When an individual has both Original Medicare and a Medicare supplement plan, Medicare pays its share of the Medicare-approved amount for covered health care costs, and then the Medigap policy pays its share, helping to reduce the beneficiary's out-of-pocket maximum. Medicare supplement plans are designed to fill in the "gaps" in Original Medicare coverage, such as deductibles, copayments, and coinsurance.

History and Origin

Medicare supplement plans emerged as a necessity to address the gaps in coverage provided by Original Medicare, which was enacted in 1965. As healthcare costs continued to rise, beneficiaries found themselves responsible for significant out-of-pocket expenses, leading to the development of supplemental private insurance products. To regulate these offerings and protect consumers, the Medicare Catastrophic Coverage Act of 1988 initially sought to expand Medicare benefits but was largely repealed. However, the need for standardized supplemental insurance remained. The Omnibus Budget Reconciliation Act (OBRA) of 1990 mandated the standardization of Medigap policies, introducing the familiar lettered plans (A through N) that private insurance companies could sell. This standardization ensures that policies with the same letter offer the same basic benefits, regardless of the private insurer. The Centers for Medicare & Medicaid Services (CMS) oversees these regulations, ensuring policies adhere to federal and state laws.¹⁹

Key Takeaways

• Medicare supplement plans, or Medigap policies, are sold by private insurance companies to cover out-of-pocket costs not paid by Original Medicare.
• These plans are standardized by letter (A through N in most states), meaning benefits for a Plan G, for example, are the same across all insurers.¹⁸
• Beneficiaries must have Medicare Part A and Part B to purchase a Medigap policy and continue paying their Part B premium in addition to the Medigap plan's premium.¹⁷
• The best time to buy a Medicare supplement plan is generally during the Medigap open enrollment period, a six-month window when insurers cannot deny coverage or charge more due to pre-existing health conditions.¹⁶
• Medigap policies are separate from Medicare Advantage Plans and do not include prescription drug coverage (Part D).¹⁵

Interpreting the Medicare Supplement Plan

Understanding a Medicare supplement plan involves recognizing that its primary function is to reduce financial exposure from cost-sharing under Original Medicare. Each standardized Medigap plan, identified by a letter, offers a defined set of benefits. For instance, Plan G generally covers the Medicare Part A deductible, Part B coinsurance, and excess charges, among other items.¹⁴ When a healthcare service is rendered, Original Medicare pays its portion first, and then the Medigap policy covers its designated share of the remaining approved costs. The interpretation revolves around how much of the "gap" in Original Medicare is covered by the specific plan letter chosen, and how that aligns with an individual's expected healthcare usage and financial comfort level.

Hypothetical Example

Consider Maria, who is 68 and has Original Medicare, consisting of Medicare Part A (hospital insurance) and Medicare Part B (medical insurance). She decides to purchase a Medigap Plan G.

One year, Maria needs knee surgery, which results in a lengthy hospital stay followed by outpatient physical therapy.

1. Hospital Stay (Part A): Maria's hospital bill is substantial. Original Medicare Part A covers most of it, but there's a deductible she would typically have to pay. Her Medigap Plan G covers this Part A deductible.
2. Physical Therapy (Part B): For her outpatient physical therapy, Medicare Part B covers 80% of the approved amount after she meets her Part B deductible. Maria has met her Part B deductible earlier in the year. Her Medigap Plan G then covers the remaining 20% coinsurance that Original Medicare does not cover, as well as any Part B excess charges (if the provider does not accept Medicare assignment).

In this scenario, Maria's Medicare supplement plan significantly reduces her direct out-of-pocket costs for the surgery and therapy, providing a more predictable financial outlook for her healthcare expenses.

Practical Applications

Medicare supplement plans are primarily applied in personal financial planning for seniors and individuals eligible for Medicare due to disability. They serve as a crucial tool for managing healthcare expenses, particularly for those who prefer the flexibility of Original Medicare but desire more comprehensive coverage against unexpected costs. About 21% of Medicare beneficiaries overall, or 42% of those in traditional Medicare, had a Medigap policy in 2022.¹³

These plans are particularly useful for:

• Budgeting Healthcare Costs: By covering deductibles, copayments, and coinsurance, a Medicare supplement plan helps beneficiaries stabilize their monthly healthcare expenditures, making costs more predictable.
• Access to Healthcare Providers: Medigap policies work with any doctor, hospital, or provider that accepts Original Medicare, offering broad access without network restrictions common in other plan types, with the exception of Medicare SELECT policies.¹²
• Reducing Financial Risk: For individuals with chronic conditions or those anticipating significant medical needs, a Medigap policy can provide substantial financial protection against high cost-sharing amounts.

The official Medicare website provides comprehensive guides on how to choose a Medigap policy, detailing the benefits of each standardized plan and outlining the process for purchasing coverage from private companies.¹¹

Limitations and Criticisms

Despite their benefits, Medicare supplement plans have several limitations and criticisms:

• Premiums: Beneficiaries must pay a separate monthly premium for their Medigap policy, in addition to their Medicare Part B premium. These premiums can vary significantly by plan letter, insurer, and location, sometimes making them unaffordable for individuals with limited incomes.¹⁰
• No Prescription Drug Coverage: Medicare supplement plans do not cover prescription drugs. Individuals needing drug coverage must purchase a separate Medicare Part D plan.⁹
• Lack of Extra Benefits: Unlike some other Medicare options, Medigap policies generally do not offer extra benefits such as routine dental, vision, or hearing care.
• Underwriting After Initial Enrollment: Outside of the guaranteed issue periods, insurance companies can use medical underwriting to determine eligibility and pricing. This means individuals with pre-existing health conditions may be denied a policy or charged higher premiums if they apply after their initial Medigap open enrollment period.⁸
• Changing Availability of Plans: Due to legislation like the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015, Medigap Plans C and F, which cover the Medicare Part B deductible, are no longer available to new Medicare beneficiaries eligible on or after January 1, 2020.⁷ This shift aims to encourage more conscious healthcare utilization, as beneficiaries face some direct costs.

Medicare Supplement Plan vs. Medicare Advantage Plan

Medicare supplement plans (Medigap) and Medicare Advantage Plans (Part C) are both options for Medicare beneficiaries, but they function very differently.

The key distinction is that a Medicare supplement plan works with Original Medicare, while a Medicare Advantage Plan works instead of Original Medicare.⁶ Beneficiaries typically choose one or the other based on their healthcare needs, financial situation, and preference for provider choice versus bundled benefits.

FAQs

Can I have a Medicare supplement plan and a Medicare Advantage Plan at the same time?

No, it is generally not permissible to have both a Medicare supplement plan and a Medicare Advantage Plan simultaneously. If you have a Medicare Advantage Plan, you cannot be sold a Medigap policy. Your Medigap policy only works with Original Medicare.⁵

What does "standardized" mean for Medicare supplement plans?

Standardized means that Medigap policies are identified by letters (A, B, C, D, F, G, K, L, M, N), and each lettered plan offers the exact same basic benefits, regardless of the insurance company selling it or where you live (with the exception of Massachusetts, Minnesota, and Wisconsin, which have different standardization). The only difference between policies of the same letter from different companies is typically the premium and how the insurer prices the plan.⁴

When is the best time to buy a Medicare supplement plan?

The best time to buy a Medicare supplement plan is during your six-month Medigap open enrollment period. This period typically begins the first month you are 65 or older and enrolled in Medicare Part B. During this time, insurance companies cannot deny you coverage or charge you more based on your health conditions.³

Do Medicare supplement plans cover prescription drugs?

No, Medicare supplement plans do not cover prescription drugs. For prescription drug coverage, you would need to enroll in a separate Medicare Part D plan.²

What are "guaranteed issue rights" with Medigap?

Guaranteed issue rights are protections that allow you to buy a Medigap policy under certain circumstances, such as losing other health coverage, without the insurer being able to deny you coverage or charge you more due to pre-existing health conditions. These rights are not always available, and specific situations trigger them.¹