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Why You Need Supplemental Insurance With Medicare


Do you plan to enroll in traditional Medicare rather than getting your health insurance through a private company? In that case, you'll need a supplemental policy to save you from getting stuck with big bills.

About 70 percent of Medicare recipients sign up for traditional Medicare, which has coverage limitations that could leave you paying enormous out-of-pocket costs. But supplemental coverage, also known as Medigap, can protect you and your wallet, says Diane Omdahl, a registered nurse who deals with Medicare.

What happens if you don't get Medicare supplement insurance, commonly known as Medigap coverage? 

"The out-of-pocket costs could drive you into backruptcy," Omdahl says.

Where Medigap fits in to your health care plan

Medicare is the federal insurance program for U.S. residents 65 and older, along with some younger people with kidney failure or other disabilities. Medicare recipients have two choices: get traditional Medicare or get Medicare Advantage, in which you get your Medicare benefits through a plan from a private company.

RELATED: Learn Your ABCs (and D) of Medicare

If you go with traditional Medicare, you sign up for Medicare Part A, which is hospital insurance and Part B, which is medical insurance that covers doctor visits, outpatient treatments and medical devices like walkers. You'll also need to get Part D, which offers prescription drug coverage, along with supplemental insurance to minimize out-of-pocket costs.

With traditional Medicare, just as with standard health insurance, you incur out-of-pocket costs like copays and deductibles. 

"If you don't have other coverage, your costs can mount up," Omdahl says.

That's partly because, unlike Medicare Advantage, traditional Medicare has no yearly limit on out of pocket costs. One example of how costs can rack up without Medigap is the hospital deductible, Omdahl says.

In 2016, Medicare Part A hospital insurance has a $1,288 deductible for each benefit period. In Medicare terms, a benefit period starts the day you get admitted to the hospital and ends when 60 days have passed since you last received inpatient care. That means you can have multiple benefit periods in a year, and pay multiple hospital deductibles.

Let's take a look at an example of how this could happen. Sally has traditional Medicare, and in January 2016, she slips on an icy patch in her driveway and fractures her hip. She stays in the hospital for a month. In April, she gets the flu and winds up in the hospital again, this time for 10 days. And in the September, she gets into a car accident and gets hospitalized yet again, this time for a week. With no supplemental insurance, Sally would have to pay almost $4,000 in hospital deductibles, plus other out-of-pocket costs. For example, she'd owe $166 for her Part B medical insurance deductible, plus 20 percent of the costs of her follow-up doctor visits.

"If someone is unlucky, they could pay the hospital deductible three or four times in one year," Omdahl says. 

How does Medicare supplemental insurance work?

The good news is that seniors don't need to get stuck with these high out-of-pocket costs. You can buy a supplemental plan that covers costs you don't want to incur, Omdahl says.

But first, in order to get supplemental insurance, you must have traditional Medicare, both Part A and Part B, she says.

You can then shop for a Medigap plan based on your individual needs. Medigap plans are standardized and designated by letters of the alphabet, from A through N. A word of caution: don't confuse these letter designations with Medicare Parts A, B, C and D, which are something else entirely, Omdahl warns.

RELATED: What Changes to Expect in Medicare for 2017

Each type of supplemental plan has different benefits and coverage, so check the details to get the right plan for you. In general, Plan A covers the least while Plan F covers the most, Omdahl says.

"Plan A is the basic plan -- you get bare-bones coverage," she says, adding that it covers only four of the nine possible benefits. On the other hand, Plan F covers all nine possible benefits. "Plan F is the Cadillac," she says. 

However, you can consider Plan G, which is like Plan F except that it doesn't cover the $166 a year Part B deductible. He recommends Plan G due to concerns about legislation that may close Plan F to new applicants and possibly cause premium hikes in the future for recipients already enrolled.

Here's a chart from that allows you to compare the available Medigap plans.

Depending on which plan you choose, your Medigap policy may cover the:

  • Medicare Part A hospital deductible, which is $1,288 per benefit period in 2016.
  • Medicare Part A hospital coinsurance. Coinsurance in 2016 is $0 for the first 60 days of the benefit period, then $322 per day for days 61 to 90. After that, coinsurance is $644 for each "lifetime reserve day." In Medicare, you get a total of 60 lifetime reserve days, which are days in the hospital that Medicare will cover beyond a 90-day stay. After you use up all lifetime reserve days, you must pay all hospital costs.
  • Medicare Part B medical care deductible, which is $166 per year in 2016.
  • Medicare Part B copays and coinsurance. After you meet your Part B deductible, you pay about 20 percent of all costs, including doctor visits, outpatient treatment and durable medical equipment like blood sugar monitors, CPAP machines and manual wheelchairs.
  • Part B excess charges, the amount a doctor is allowed to charge over what Medicare pays.
  • Hospice care coinsurance or copayment.
  • Skilled nursing facility coinsurance.
  • Coverage when you're traveling outside the United States, which traditional Medicare doesn't cover.

As you shop for supplemental insurance, look carefully at what each plan covers and choose the one that's the best fit for you, Omdahl recommends.

When you're first enrolling, the insurance company has to accept you and can't charge you extra based on your health status, Omdahl says. After your first six months on the plan, you can apply to switch plans, but the insurer then can decide whether to accept you, she says.

"Think it through carefully because you may have this coverage for a good chunk of your life," she says.

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