Medigap coverage – balancing premiums and your out-of-pocket risk

I began administering employer based health plans beginning in1961. In all those years the typical plan had a modest deductible and coinsurance of 20%. Starting in the late 1970s we saw changes with the introduction of HMOs promising lower costs in return for tighter control over health care services (unfortunately an unfulfilled promise). This evolved into point of service plans providing a lower deductible and lower coinsurance or a co-payment if in-network services were utilized. Today we have several variations and ever-increasing (high) deductibles and co-payments with the insured paying upward of 25% of premium even in the best employer plans. Current thinking says that if the patient has a greater stake in the cost of care they will be better consumers.

The point is that regardless of the plan, there was a deductible to be met and a co-payment or coinsurance to be paid except for extraordinary annual costs eventually reaching an out-of-pocket limit.

Then we have Medicare with a hospital deductible, a low Part B deductible a 20% coinsurance, extended hospital stay co-pays and under the Affordable Care Act a growing array of services provided subject to neither a deductible or co-pay. While there is no out-of-pocket limit, fees are deeply discounted and there are strong caps on provider balance billing. Beneficiaries for the most part pay only 25% or less of the cost of Part B and nothing for Part A. This results in beneficiaries paying about 11% of the total cost in premiums (not including taxes paid in the past which were used by then current Medicare recipients).

Inpatient Hospital Deductible $1,132

Inpatient Hospital Coinsurance
$283 per day for days 61–90
$566 per day for days 91-150
$275 per day for days 61-90
$550 per day for days 91-150

Skilled Nursing Facility Coinsurance
$141.50 per day for days 21-100
$137.50 per day for days 21-100

By most measures Medicare is good coverage that many younger people would love to enjoy. But this is not sufficient. Many Medicare beneficiaries want 100% coverage so they spend an additional $250 or more a month (mostly more) to obtain coverage for the Medicare deductibles and coinsurance, a level of coverage virtually non-existent in the under age 65 population. This removes substantial concern over the utilization of health care services.

If a couple has $500 or more a month to spend on supplemental coverage, they may be better served putting that money in an investment to be used when necessary for out-of-pocket costs or for related costs such as dental, vision and hearing services. In essence, a Medicare Health Savings Account. Of course, such a special account does not legally exist, but saving the $500 is still an option. Sometimes our fear of health care expenses clouds our judgement, extensive Medicare supplemental coverage may be one of those times. Consider that the average hospital stay under Medicare is under six days and even the average length of stay in a skilled nursing home is about thirty days

Health care costs are not related to income so high out-of-pocket costs impact lower-income individuals far more than higher income, but that is not unique to Medicare, it is always the case. On the other hand, a fixed expense of say $500 a month as in this example may be more of a burden to lower-income individuals.

There is a balance to be considered between supplemental coverage for only the most catastrophic expenses such as a very prolonged hospital stay and accumulating funds on a “self-insured” basis for more routine expenses and which can also be used for other purposes not normally covered by Medigap policies.

In deciding how much to spend on Medigap coverage, consider your potential financial risk, how much you can absorb and whether all or some of the premium you pay would be better in your pocket by buying coverage only for that portion of the risk you don’t want to take as opposed to reimbursing you 20% of office visits and more average expenses that may not exceed your monthly premiums.