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How do Medigap plans work? Here’s a tutorial

Editor’s Note: Journalist Philip Moeller is here to provide the answers you need on aging and retirement. His weekly column, “Ask Phil,” aims to help older Americans and their families by answering their health care and financial questions. Phil is the author of “Get What’s Yours for Medicare,” and co-author of “Get What’s Yours: The Revised Secrets to Maxing Out Your Social Security.” Send your questions to Phil; and he will answer as many as he can.

I was not planning on doing a tutorial on Medigap supplement plans until I saw that the Kaiser Family Foundation has done one of its own. Like most Kaiser work, it’s so clear and complete that I will be referring to it for years to help address the many reader Medigap questions I receive.

Who gets Medigap and what does it cover?

Nearly 10 million people buy Medigap policies each year along with basic Medicare (Parts A and B) and, for most, a Part D prescription drug plan. Depending on the kind of plan they purchase (there are 11 different choices), Medigap will pay most or even all the expenses covered by Medicare which are not fully paid by Parts A and B. The biggest gap is that Part B of Medicare pays only 80 percent of covered expenses.

Nearly two-thirds of Medicare enrollees have basic Medicare, with about 35 percent of enrollees instead choosing Medicare Advantage plans. Medicare Advantage enrollees aren’t permitted to buy Medigap plans and, in fact, don’t really need them. This is because MA plans have their own out-of-pocket ceilings that protect people from paying more than $6,700 a year, excluding premiums, for Part A and B expenses that their insurance does not fully pay. Plans are allowed to set ceilings of less than $6,700 and, while some do, more and more plans are employing the maximum ceiling permitted by Medicare.

What are Medigap’s limits?

Most likely, more people would buy Medigap plans if they could afford the monthly premiums, which easily can equal or exceed the $134 monthly premium that most people lay out for Part B of Medicare. The other key limitation for Medigap plans, explained in helpful and needed detail in the Kaiser report, is that these policies often lack the protections afforded to buyers of other types of Medicare coverage.

If someone wants to buy a Part D drug plan or a Medicare Advantage plan, they are guaranteed that insurers selling such plans where they live must sell them a plan without raising rates or penalizing them for their age or pre-existing health conditions (there are exceptions, most notably for smokers).

These guaranteed rights also extend to existing Medicare enrollees who want to change Medicare plans during the annual open enrollment period that runs from Oct. 15 through Dec. 7. Being able to freely switch Part D plans and Medicare Advantage plans — or to switch from basic Medicare to Medicare Advantage or vice versa — is a terrific tool for consumers that helps not only them but, by stimulating competition, all Medicare beneficiaries.

However, these guaranteed issue rights often aren’t available to people who have had Medicare plans for a while and then want to buy Medigap plans or switch from one Medigap plan to another. Unlike other private Medicare insurance plans, Medigap plans are regulated by the states. And while the specific coverage in the 11 different types of plans are dictated by federal rules, the prices and availability of the plans depend on state rules.

Federal rules do provide guaranteed issue rights for Medigap purchasers when they are new to Medicare and in some circumstances when they switch between Medicare Advantage and basic Medicare. The devil really is in these details, so I will forever be referring people to a table in the Kaiser report (see the link above) that explains the exact conditions under which people have guaranteed issue rights to Medigap plans.

However, once the six-month period of federally mandated rights has passed, state rules take over determining the rights people have if they wish to buy new Medigap plans. Here, the Kaiser table of state-by-state rules is invaluable. It should be a mandatory stop for anyone thinking about the role of Medigap in their Medicare plans.

How do Medigap rules differ in different states?

Only four states – Connecticut, Massachusetts, Maine, and New York – extend guaranteed issue rights to Medigap for everyone age 65 or older. The other 46 states and the District of Columbia all have prohibitions and wrinkles, including three states – Massachusetts, Minnesota, and Wisconsin – that sell only one or two types of Medigap plans and depart from the 11 “letter” plans allowed under federal rules.

In most states, people can face higher Medigap rates or even coverage denials if they try and buy plans once their period of guaranteed issue rights has expired. Insurance brokers regularly tell me that this possibility is seldom the case and that people in their states have no problem switching plans without difficulty and without getting hosed by higher premiums. I have not seen hard data on such conversion experiences, and regularly tell readers to test the market for new policies in their state before they switch into or out of a Medigap plan during open enrollment.

However, I suspect that fear of a possible problem makes many Medigap policyholders resistant to change. This situation cancels out the possible benefits of open enrollment, and likely costs these folks both potentially improved insurance benefits and some money.

Suggestions for Medigap fixes

Another problem with Medigap access rights is that the federal standards do not apply to more than 9 million disabled Medicare beneficiaries who are younger than 65. About 60 percent of the states do provide limited Medigap rights to this group. However, only 5 percent of Medicare enrollees younger than 65 had Medigap plans in 2015, according to the Kaiser report.

Kaiser’s policy experts mention some possible policy fixes to expand the availability of Medigap, including expanding guaranteed issue rights for younger disabled enrollees and people who want a Medigap plan when they switch out of Medicare Advantage plans into basic Medicare.

They also note that creating an annual open enrollment period with guaranteed issue rights for Medigap plans would put them on an equal footing with other private Medicare insurance plans.

“A different approach altogether,” the report concludes, “would be to minimize the need for supplemental coverage in Medicare by adding an out-of-pocket limit to traditional Medicare.”