Watch Out for the ‘Medigap Trap’

Key Takeaways:

• Switching Isn’t Simple: Moving from Medicare Advantage to traditional Medicare can be complicated due to challenges in obtaining Medigap coverage later.
• Limited Medigap Enrollment Window: Guaranteed access to Medigap policies is typically only available during the first six months of Medicare eligibility.
• High Out-of-Pocket Costs Without Medigap: Without supplemental coverage, traditional Medicare can result in substantial out-of-pocket expenses.
• State Exceptions Exist: Only four states guarantee Medigap access regardless of health conditions.
• Early Planning Is Essential: Careful consideration of initial Medicare choices can prevent future financial and coverage issues.

Navigating the Medigap Trap

A bit of foresight can save you from the so-called “Medigap Trap”—one more critical rule to understand when navigating Medicare and Medicare Advantage (MA). It’s a common mistake to enroll in an MA plan when relatively healthy, thinking you can simply switch to traditional Medicare as you get older and sicker. However, this strategy may backfire.

Understanding Medicare Advantage vs. Traditional Medicare

MA plans can be attractive when first enrolling in Medicare for beneficiaries who aren’t worried about network restrictions on doctors or pre-approval requirements for high-level care. Technically, people who choose an MA plan can change their minds every year during open enrollment and move to traditional government-run Medicare with its unrestricted access to providers who accept Medicare.

The Illusion of Easy Switching

It may be tempting to consider switching to traditional Medicare when health declines or there’s a need to see providers not in the MA network. But as David A. Lipschutz, co-director of the Center for Medicare Advocacy, warns: “There’s not free movement between traditional Medicare and Medicare Advantage in large part because of the barriers to picking up a Medigap policy.”

The Role of Medigap

Medigap is the umbrella name for an array of private insurance policies that supplement traditional Medicare, making out-of-pocket costs for care more manageable. Without Medigap, out-of-pocket costs for traditional Medicare enrollees can be overwhelming. To start, patients must pay 20% of the cost for covered medical services after meeting a deductible. Patients hospitalized for a long period can be charged as much as $816 per day. These charges can add up quickly.

Barriers to Obtaining Medigap Later

A separate Medigap policy can cover many of these costs, making treatment under traditional Medicare more affordable. However, if a Medicare participant doesn’t enroll in a Medigap plan when first signing up for Medicare, supplemental coverage may be unavailable later. In most states, Medigap plans are automatically available only during the first six months after an enrollee becomes eligible for Medicare. After that, health screenings may be required, and plans can refuse coverage or charge higher rates for those with health issues.

Where You Live Matters

Only four states—Connecticut, Massachusetts, Maine, and New York—prohibit insurers from denying a Medigap policy to eligible applicants, including people with pre-existing conditions. As Lipschutz notes, “Unless you’re in one of those handful of states, you very well might find that you cannot purchase a Medigap policy and then it could be very expensive.” For enrollees in other states, the higher cost of care without Medigap may make a traditional Medicare plan unworkable.

The Importance of Early Planning

The key takeaway is the importance of early and informed decision-making regarding Medicare choices. Beneficiaries should carefully consider their long-term healthcare needs and the potential financial implications before opting for an MA plan with the intent to switch later. Being proactive can help avoid unexpected expenses and ensure access to necessary healthcare services.

Note: This article is based on a story that first appeared in Kiplinger Retirement Report, a monthly periodical covering key concerns of affluent older Americans who are retired or preparing for retirement.