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What to Know Before Shopping for Medigap

Mark Miller
Christine Benz

Editor's note: A previous version of this video contained incorrect information about a change for C and F policies. An edited version appears here.

Christine Benz: Hi, I'm Christine Benz for Morningstar. One in four people covered by Medicare has a Medigap policy, but that means that three fourths of people covered by Medicare do not. Joining me to discuss Medigap policies is Mark Miller. He is a Morningstar contributor.

Mark, thank you so much for being here.

Mark Miller: Glad to be here, Christine.

Benz: Mark, let's talk about Medigap policies. What do they cover?

Miller: It's supplemental coverage that people use with traditional Medicare. A good starting point would be, just remember that the landscape of choosing a Medicare plan has two paths. You can be in the traditional Medicare program, which is fee-for-service, where you have Part A and you have Part B, which covers your doctor visits and you probably a couple of things on top of that.

The other path is, Medicare Advantage, which is more of an all-in-one solution. Generally speaking, a managed care solution such as a PPO or HMO where everything is included. Medigap is used on the traditional Medicare side, and it's used to plug gaps in the coverage that traditional Medicare offers.

Benz: Just a little bit of terminology I'd like to clear up: You sometimes hear about supplemental policies …

Miller: It's the same thing.

Benz: Same thing. OK.

Miller: Some people call it MedSup, but they are called Medigap policies normally.

Benz: One statistic jumped out at me in a recent article you wrote for us, that 1 in 4 people has these policies. But that means that a lot of people do not. Are some people covered for these other costs out-of-pocket in some other way?

Miller: As I mentioned, if you are in Medicare Advantage, you don't use Medigap. In fact, it's illegal for an insurance company to sell you Medigap …

Benz: Because it would be redundant.

Miller: Right away, you take out about a third of the enrolled Medicare base, everybody who is in Advantage. Second is, a lot of people get some form of supplemental coverage through an employer, retiree health benefit or through a union. And then about 20% of people on Medicare are what's called dually eligible, meaning that their income is low enough that they get Medicaid as well as Medicare. And those folks get a lot of coverage through Medicaid that doesn't come through Medicare.

While the 1 in 4 number sounds kind of low, there are reasons for that. It's not to say that everybody who is eligible for Medigap and doesn't have one of those other things, buys it, but it's fairly popular thing to do if you have traditional Medicare.

I'd just add that a lot of experts on Medicare feel that kind of the gold standard of coverage for people who can swing it is traditional Medicare plus Medigap plus a Part D prescription drug plan. The reason for that is that even though it may wind up being a little more expensive, particularly short term for younger seniors who tend to be healthier, it gives you the most flexibility and choice of healthcare providers that you can possibly get. Medicare Advantage, as I mentioned, is Managed Care, meaning you have to deal with closed networks of providers from elsewhere.

Benz: You might be constrained in some way. You talked about how a lot of folks are covered in some other fashion, but I sometimes do run into people who say, you know what, I'm going to forgo this, I'm healthy, I don't think I need this sort of supplemental policy. Is that a reasonable approach for people who are in good health?

Miller: It can be. But it's worth remembering this that the best time to sign up for a Medigap policy is when you first sign up for Part B. The reason for that is that by law an insurance company cannot turn you away, the so-called medical underwriting, for a pre-existing condition and they have to offer the policy to you at the lowest possible price. It's the most advantageous time to buy it. You could certainly delay and say, well, I'm in good health and I'm not going to need this and sign up later. But it's a bit of a roll of the dice just to how much more you'll pay for it later.

Benz: Say someone does have maybe a few years or very good health not needing much in terms of out-of-pocket costs but later on encounter some more serious health condition, then pre-existing condition clauses might apply?

Miller: Yeah, the insurer could charge you hundreds or even thousands of dollars more for the policy, with the exception of three states: Massachusetts, New York and Connecticut, which have ongoing guaranteed issue rights. They have the strongest regulatory posture in the country. If you in any of those three states, as I said in the article, you've hit the Medigap jackpot. You could sign up for it anytime with a guaranteed issue right.

Benz: Let's get into some shopping tips for people who are looking to sign up for some type of Medigap policy. What should they know before they go?

Miller: There's kind of an alphabet soup of letters, and we have that described in the column that I did recently. More than half of Medigap buyers buy the most comprehensive policies which are C and F policies. Don't get scared by the alphabet soup of letters. There is a terrific in-depth guide to Medigap policies that we link to in the article that gives you chapter and verse on what all they cover. It's worth knowing that, the things that it cover includes hospitalization deductibles, which can get quite high for lengthy stays; the Part B deductible, which we'll come back and talk about in a minute because that has to do with the phase out of C and F; it covers deductibles for skilled nursing facilities; a range of other things.

The other thing worth knowing is that the prices of these policies can vary quite a bit from state to state. But even more importantly, within a state you get a range of different prices for the very same product. We have a little chart and a story that shows that. It's definitely worth shopping around. A lot of people kind of tend to default to either the name of an insurer that they know and trust or hey, my neighbor has this one and likes it. You might wind up paying hundreds of dollars more for that policy per month than if you shop the market a bit. That is definitely worth knowing.

These policies are really the same. The letters are regulated nationally. A C plan in Illinois has to have the same coverage as the C plan in Ohio or California. They are the same. There is no particular reason to pay a lot more. The only additional thing to say about that is, you want to look for an insurer with strong rating, strong financial stability because it's going to be a partner throughout your retirement, one hopes. But do shop for price because oftentime there is no particular reason to pay hundreds of dollars more for the same product.

Benz: How about switching around? Once I've chosen my initial provider, are there any limitations to how often and when I could make changes?

Miller: If you make changes after that initial enrollment period, you could be subject to much higher prices because you're outside of that guaranteed window. If you move from state to state, if the insurer that you are using has an offering, a similar offering in the state you're moving to, they will move you to their product in that state, but the price could go up. Price can change.

It's also worth mentioning though that price can change, period. Let's say you sign up during your guaranteed issue window at the beginning, there's nothing to say that the price of that policy can't jump down the road. There are several different ways that insurers are allowed to calculate price increases down the road. The price of a policy can go up. One thing I caution about is to look out for sort of a very low come-on rate that could change quickly. The way to know about that is to ask an insurer about what the history is of price increases, for example, to find out, because people could just be trying to get market share with an initial low rate that's going to really jump in the out years.

Benz: An alphabet soup, but one worth paying attention to.

Miller: Yeah, definitely.

Benz: Thanks so much for being here, Mark.

Miller: My pleasure.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.