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Your Clients’ Medicare Costs—Look Beyond the Premiums

Out-of-pocket spending is the real planning challenge.

Health care is one of the largest budget items for most retirees.

A good portion of that expense will be Medicare premiums—but that’s a steady and relatively predictable cost. A significant portion will be uneven, difficult-to-predict out-of-pocket spending—and here, financial planners can play an important role helping clients, especially when they first sign up for Medicare.

The most important choice your clients make at that point is between traditional fee-for-service Medicare or Medicare Advantage, the managed care alternative offered by commercial insurance companies. Advantage has been growing rapidly in recent years, partly on the strength of its convenience—many plans come with prescription drug coverage included, and there is no need for a Medigap supplemental policy. On the surface, costs seem lower too—you still pay your Part B premium, but many plans cover prescription drugs with no additional premium. And Medigap supplemental plans, which can easily cost $200 per month or more, are not used with Advantage.

But Advantage actually can be the more expensive choice if you use a great deal of health care services in a given year. Since 2011, all Advantage plans have been required to cap out-of-pocket expenses. In 2021, for example, the maximum allowed out-of-pocket limit was $7,550 for in-network services and $11,300 for in-network and out-of-network services combined. In practice, most HMO and PPO Advantage plans have a somewhat lower out-of-pocket ceiling—in 2021, it was $5,091 for in-network services and $9,208 for in-network and out-of-network services combined.

Traditional Medicare does not have a built-in cap on out-of-pocket expenses, but most seniors have additional supplemental coverage to smooth out those bumps—some get retiree coverage from former employers or unions, and low-income enrollees get Medicaid.

Many others purchase Medigap policies. Here, a careful look at the trade-offs of premiums and deductibles is warranted.

Medigap coverage levels depend on policy types, which come in an alphabet soup of lettered plan choices that may seem complex at first glance. Premiums will vary according to location and the age of the purchaser. But the benefits offered by plans are standardized across insurers and across the country, which makes it easier to compare plans based on the premium alone. That is, all insurers offering Medigap Plan G in Ohio must offer the identical benefits, and G plans in Ohio must be the same as G plans in California.

The key difference is the percentage of coinsurance and deductibles picked up by different plan types. For example, the popular G plan provides strong coverage for the most significant out-of-pocket costs your clients might face. These include Part A hospital coinsurance and deductibles, outpatient coinsurance and skilled nursing facilities. (The Medicare Rights Center publishes a detailed table describing all Medigap plan options).

That protection comes with a price. In Illinois, for example, one prominent insurer offers G plans for 2022 for $1,668 per year for a 65-year-old enrollee. But that premium will escalate throughout retirement, because it is priced using “attained age.” That means the policy is priced for the buyer’s current age, and the premium will rise to match the expected higher medical expense of an older policyholder. At age 75, the premium for this G plan will be $2,718, and it jumps to $3,564 at age 85.

(Attained age is the most common pricing structure; some states use “issue age,” which pegs the price to your age at the time you buy but can rise if medical costs for the entire pool rise. A few states use “community rating,” which sets a uniform price for a given plan type.)

But there’s another intriguing Medigap option that strikes a middle ground on out-of-pocket costs between traditional Medicare and Advantage. Some insurers offer high-deductible options for plans F and G. (Plans F and G are available only to people who became eligible for Medicare before Jan. 1, 2020) These plans come with significantly lower premiums.

Back to our Illinois example. That same major insurer offering a standard G policy for $1,668 to our 65-year-old will sell her a high-deductible G plan for $601 per year. The deductible amount, set nationally, in 2022 is $2,490 before the policy begins to make the payments required for all G policies.

For your client, the choice between the standard and high-deductible G plans really comes down to the sunk cost of premiums compared with her ability to handle the deductible in years when health care use is high. Yes, she also would probably need to enroll in a stand-alone Part D prescription drug plan, but these plans can be purchased at reasonable premium rates: The average monthly premium in 2022 is $43, according to the Kaiser Family Foundation.

It’s also worth remembering that your client faces an even higher out-of-pocket exposure in Medicare Advantage. There is one other big plus here: When your client enrolls in traditional Medicare, she has access to a far wider and more stable pool of health care providers.

Nearly all Advantage plans are HMOs or PPOs, which means they use managed care networks. The providers in these networks can, and do, change regularly. What’s more, a client who encounters a serious illness might find that a desired specialist is out of network. In traditional Medicare, you can see any health care provider in the U.S. that accepts Medicare (nearly all do). That’s a deal that is difficult to find anywhere else in the U.S. health care system.

The decision to pick traditional Medicare paired with a Medigap plan is best made at the point of initial Medicare enrollment, due to the program’s “guaranteed issue” feature. This forbids Medigap plans from rejecting you, or charging a higher premium, due to a preexisting condition.

The guaranteed issue opportunity is available during your six-month Medigap Open Enrollment Period, which starts on the first day of the month in which you're both 65 or older and enrolled in Medicare Part B.

After your guaranteed issue period, Medigap plans in most states can reject applications or charge higher premiums due to preexisting conditions, with the exception of four states that protect Medigap applicants beyond the guaranteed issue period—New York, Connecticut, Maine and Massachusetts all have some form of guaranteed issue rules for later Medigap enrollment.

So, consider the sweet spot for your clients: traditional Medicare, paired with a high deductible Medigap plan.

Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to Morningstar and the AARP magazine.

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