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What Senator Elizabeth Warren Gets Wrong About Medigap Insurance

In early March, Senator Elizabeth Warren released a report about the incentives giant insurance companies offer to agents selling Medicare Supplement Insurance (otherwise known as Medigap policies). The report noted that the incentives steer unsuspecting seniors into products that “cost them hundreds or thousands of dollars more each year.”

More than what? The report does not specify but my guess would be Medicare Advantage plans, an alternative to Original Medicare with a supplement. In 2022, 98% of beneficiaries had access to a zero-premium Medicare Advantage plan but many people still opt for a Medicare supplement. You might think this is a horrible substitute when there are lower-premium plans available. But there’s more to this story than just premiums.

“No premium” does not mean “No costs”

At age 65 or upon retirement, individuals enroll in Medicare Part A, hospital insurance, and Part B, medical insurance. They have Medicare coverage, but they also face out-of-pocket costs. For example, hospitalization comes with a $1,600 deductible and there’s a 20% coinsurance for every outpatient service.

The two options for additional coverage and protection from unlimited costs present dramatically different ways to handle costs.

1. A Medigap policy has a monthly premium that, as noted in the report, can range from $98.75 to $248.67. However, once enrolled in a policy and seeing healthcare providers who accept Medicare, a beneficiary has predictable out-of-pocket costs.

2. A Medicare Advantage plan has no or low premiums but there is cost sharing for most services, such as $395 per day for the first five days of hospitalization or a 20% coinsurance for dialysis treatments. The beneficiary writes checks until reaching the plan’s out-of-pocket maximum limit, which varies depending on the plan and the beneficiary’s location. The government set this year’s maximum at $8,300 for in-network services.

So, annual premiums for Medigap policies can be several hundred dollars more than Medicare Advantage plans. However, pay attention to the bottom line. How much will Medicare cost you in a year?

Stay healthy and a zero-premium Medicare Advantage plan is probably the best option. But aging is a strong risk factor for many chronic diseases. The older we get, the more likely we will need healthcare services. And that’s when the bottom line can change. Consider a 75-year-old man diagnosed with cancer.

If he had Medigap Plan G (a popular supplement), his only out-of-pocket cost would be the Part B deductible, $226 in 2023. Using a monthly premium of $248.67 (the top of the range in the report), the most he would pay this year for Part A and Part B services would be $3,210.04 (premiums plus the deductible).

Most Medicare Advantage plans charge a 20% coinsurance for chemotherapy, so the plan’s maximum limit becomes important. The average out-of-pocket limit for Medicare Advantage enrollees is $4,972 for in-network care.

Bottom line: With a Medigap policy, this man would face about $3,200 in out-of-pocket costs this year, compared to almost $5,000 with a Medicare Advantage plan. In other words, premiums aren’t the only healthcare-related costs you need to consider when choosing between Medicare Advantage and Original Medicare with a supplement.

Sales incentives are a fact of life for everything from electrical controllers to cars to Medicare insurance. Become a smart shopper, not an unsuspecting senior.

  • Take some time to find the right agent.
  • Before meeting with an agent, do your homework so you know what coverage you need and how it will work
  • Shop around for the best overall deal.
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