As an advisor working with retirees, one of the most common questions I am asked is, “Should you choose Medigap or a Medicare Advantage Plan?”

Before I get to that, I’ll lay out an example for why this choice exists in the first place and then we can get into the weeds of these two plan options. I’ll also provide pros and cons for each coverage type and who each coverage might work best for as well as what you can expect from your retirement health coverage. Next week I will address some other FAQs about Medicare.

What is Medicare?

Medicare is a federal health insurance program.  Generally, when people talk about Medicare, they are talking about Medicare as a comprehensive program, but it’s actually broken into parts.  The first part is called “Original Medicare” which includes Parts A and B.  Parts A and Part B are designed to cover part of the expenses related to hospital visits and most other medical services.  On the surface, based on this statement, it would seem that all you might need is Part A and Part B, but that is highly unlikely.  Let me explain.

Gaps in Original Medicare Coverage

There are gaps in Part A and Part B system coverage.  It’s actually called “co-insurance.” If you elect to forego a supplemental policy, this means you are taking on part of the financial risk in your healthcare.  In fact, if all you have in retirement is Parts A & B, you will be subjecting yourself to significant (virtually limitless) risk.  What do I mean?

As an example, let’s say you are retired and opted for just Parts A & B.  Unexpectedly, you are diagnosed with cancer.  As you probably know, there are significant costs in front of you such as surgery that can accompany such a diagnosis, plus the cost of on-going treatments.  People on Original Medicare must pay the initial Part A $1,364 deductible per benefit period (60 days). 

There are additional nuances to the remaining deductible, but beyond the initial responsibility, you would be on the hook for 20 percent of the cost of most kinds of outpatient treatments, doctor visits and the like.  And unlike the insurance plan through your employer that you are accustomed to, there is no cap on the 20 percent portion that you are liable for. 

So, if you were diagnosed with cancer or any other condition, and your bills for the year beyond your deductible are $100,000 (which doesn’t take long), you would be on the hook for $20,000.  You’ve no doubt seen bills from your healthcare provider and know that the bills can add up quickly.

The way you limit this risk is by choosing between two main options:

1. Medicare Supplement (aka Medigap).
2. Medicare Advantage Plan (aka Part C). 

Deciding between these two will be one of the most important Medicare-related decisions you’ll face.  In the case of both Medigap and Medicare Advantage plans, you are guaranteed acceptance into either program (no questions asked) when you begin Part B of Medicare.  Also, in both cases, you will need to pay your Part A (most people get this for free) and Part B premium.

Let’s get into the weeds.

Medigap vs Medicare Advantage Plan

Medigap Plans

Medigap plans are offered by private insurance companies and cover most or all of Original Medicare’s out-of-pocket expenses.  Once Original Medicare has paid your claims, the shortfall is sent to your Medigap plan which will then pay its portion of the bill which is 100 percent of the shortfall in many cases including all deductibles, premiums, and copayments.  Medigap has standardized plans in 47 states with Massachusetts, Minnesota, and Wisconsin offering their own plans.

Medigap plans typically come with higher premiums than Medicare Advantage Plans, but have few, if any, out-of-pocket expenses.

The plans are categorized by letter - A, B, C, D, F, G, K, L, M, and N.  Each plan with the same letter offers the same benefits regardless of state.  This is a link to the Medicare.gov website that explains the differences between each type of Medigap Plan.

Medicare Advantage Plans

Medicare Advantage plans work a lot like your employer-sponsored health care plan that has an accompanying deductible.  Typically, services such as doctor visits, lab work, surgeries and other services are covered by a small co-pay.  Each plan places a yearly limit on your total out-of-pocket expenses.  Depending on the area that you live, these plans may come in the form of an HMO or PPO and require the use of their network of physicians.  An HMO (as many Medicare Advantage plans are) requires seeing a primary care physician as a gatekeeper prior to seeking the help of a specialist.  A PPO allows you go out of network at your discretion, albeit with additional costs.

Medicare Advantage plans often include prescription drug coverage, but you will want to verify that any specific drugs that you currently take are covered by your specific plan.

Advantages / Disadvantages of Medigap Plans

Advantages of Medigap Plans:

• You can receive care anywhere that Medicare is accepted (almost everywhere).  As a result, you can go to any doctor or hospital in the country that accepts Medicare.  Medigap will help cover the remaining Medicare out-of-pocket expenses.
• You do not need a referral to see a specialist.
• Less paperwork.  Medigap will work on your behalf to send a payment to the doctor or facility without your involvement.
• It may cover emergency medical even when traveling out of the country.
• You can transfer to a Medicare Advantage plan anytime during any Annual Election Period.
• Typically lower out-of-pocket expenses than a Medicare Advantage plan.
• All plans are standardized by law, so each Medigap of the same letter will cover the same benefits regardless of the insurance company selling it.  Please note, however, that these companies can charge different prices for the same coverage, so it pays to shop around.
• Medigap does not provide prescription drug coverage, so you will need to purchase a Part D plan.  The reason this could be construed as an advantage is because it provides you the flexibility to independently choose from any of the Part D plans to allow you to tailor-fit your plan to your needs.  (See below for why this could be considered a disadvantage.)

Disadvantages of Medigap Plans:

• Medigap does not provide prescription drug coverage, so you will need to purchase a Part D plan.  So, if you simply want an all-in-one solution, this is not it.  (See above for why this could be considered an advantage.)
• Does not cover dental care or vision care.
• Premiums are generally higher than that of Medicare Advantage plans.

Advantages / Disadvantages of Medicare Advantage Plans

Advantages of Medicare Advantage Plans:

• Has the familiar feeling of an employer-sponsored health plan in a lot of ways.  (I fully acknowledge that this could be a negative for some people.)
  • It is familiar in the sense that you’ll have deductibles, co-pays, drug coverage, physician networks, etc…just like most employer plans.
• Many plans include prescription drug coverage.  So, if you want an all-in-one solution, this may be a fit.  You’ll want to verify that the plan you are considering covers your current prescriptions before enrolling.  (See below for why this could be considered a disadvantage.)
• Commonly covers dental and vision care. Generally, this coverage is for routine annual visits only.

Disadvantages of Medicare Advantage Plans:

• The downside of having a prescription drug coverage as part of your Advantage Plan is that their formulary could change from year to year, meaning that prescriptions that were previously covered may not be covered year over year.  This will be something you will want to check each and every year.  (See above for why this could be considered an advantage.)
• Benefits are typically only provided in-network.  This can be both a geographical and “best doctor” limitation.  For example, if you live in an area with multiple health systems, you will likely be limited to the doctors in your network rather than wherever the “best doctor” practices.
• Generally, you cannot transfer to Medigap plans at will. You must answer health questions to qualify, at which point you could be denied.
• Benefits are more restrictive than Medigap plans.
• Because these plans are considered “managed care”, providers aim to keep their healthcare costs within budget by trying to prevent overuse.  They do this by requiring prior authorization for various medical requests.

Who might consider Medigap?

The truth is only you can decide, so this is just food for thought.  Here are some common reasons to consider a Medigap plan:

• You’re willing to pay a little bit more in premium to reduce your overall health care risks meaning that you want a more contained cost of healthcare.  Because of the way that Medigap plans are structured, your primary expense is the premium since as a general rule, Medicare will pick up 80% and Medigap will pick up the other 20%.  The only cost you’re generally left with is the Part D premium and copays for prescription drugs via your part D plan.
• You have significant assets.
• You have health concerns or ongoing medical issues.  The premiums will be higher, but your out-of-pocket expenses will likely be lower.  So, if you are someone with a lot of medical expenses, the higher premium Medigap policies can end up being a better deal.
• You want the flexibility of which doctor to see, regardless of network.
• You like the fact that you do not need a referral to see a specialist.
• You intend to travel domestically or internationally through your retirement or if you intend to snowbird for part of the year.  If this is the case, you will likely derive more benefit from a Medigap plan.  This is due to the fact that under Medigap, you can see any doctor in the country that accepts Medicare, which is almost everywhere.  By contrast, if you have a Medicare Advantage plan, any time you are away from your primary care area, each doctor visit will be an out-of-network visit, and therefore cost much more.

Who might consider a Medicare Advantage Plan?

I will reiterate that only you can decide, so this is just food for thought.  Here are some common reasons to consider a Medicare Advantage plan:

• You want an all-in-one solution.  Most plans offer a Part D as part of the plan (you will want to verify that your current prescriptions are covered by the plan you choose).
• You feel comfortable with your health plan through work and would like to keep a similar arrangement.
• You like having a primary care physician guide the care you receive.
• You are in particularly good health and are okay with the financial implications if and when that changes.  This could amount to quite a savings due to the lower premium Medicare Advantage plan.
• You are not an active traveler domestically or internationally.

Can I have both a Medigap and Medicare Advantage Plan?

No, you cannot.  Medigap plans do not work with Medicare Advantage plans.

What if I change my mind?  Can I change plans if I decide the other plan is better for me?

If you decide that you do not like your Medigap plan, you can always choose to enroll in a Medicare Advantage plan during the seven-week Annual Election Period from October 15 through December 7.

On the contrary, if you decide that you do not like your Medicare Advantage plan, you would have to answer health questions to enroll in a Medigap plan, in which case you could be denied.

This is why this initial decision is so important particularly if you are interested in Medigap.  Knowing that you can always change to Medicare Advantage from Medigap, but not always the reverse makes the Medigap offering that much more appealing.

What should you expect to pay for a Medigap or Medicare Advantage Plan? 

Premiums can vary significantly under both types of plans but typically range between $0 (at times) up to and beyond $300 per month depending on a variety of factors.  Some offer discounts for spouses that are both enrolling.  The only way to know this for sure is to get some premium quotes from a qualified impartial provider.

It is important to note that in both Medigap and Medicare Advantage plans, higher premiums do not equate to better coverage.  Do your research on individual plans to ensure you are getting the most benefits for the premium you are paying.  It would also be important to note that these premium costs are not to be considered your all-in costs, as there could be potential deductibles, co-pays, and co-insurance that must be factored in to decide which plan could be a better fit from an overall cost and care perspective.

How to Choose Your Medicare Plan:

When making the choice between Medigap or Medicare Advantage Plans, consider the advantages and disadvantages above as well as the costs associated with each.  Know the deductibles you should expect, monthly premiums, restrictions on doctors, hospitals, and pharmacies, as well as what your maximum out-of-pocket expenses could be.  Choosing a plan for your healthcare through retirement is truly a personal choice and warrants a bit of homework and/or a consultation with an unbiased Medicare expert.

The State Health Insurance Assistance Program is a great source of information and assistance in deciding on a plan.

You may also consider utilizing the Medicare Plan Finder for a more DIY strategy.  It is a helpful tool that lets you narrow down your plan choices by location, and a variety of other specifics.  Here is a link to the Medicare Advantage Plan Finder.  And here is a link to the Medigap Plan Finder.

Lastly, if you want a more personal approach with someone that can help answer questions, you might consider Boomer Health Group. While I cannot endorse them as a firm, I’ve had multiple conversations with them and feel they do a great job educating throughout their process as well as help you identify a specific plan that might work best for you.

Hope this helps in your research!

Related Reading:

How to Avoid the Lifelong Medicare Penalty

Medicare Part B Estimates Through 2028

Disclosure: The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Ashby Daniels and not necessarily those of RJFS or Raymond James.  You should discuss tax or legal matters with the appropriate professional.