Should I Get A Medicare Supplement or Advantage Plan?

When looking into getting extra healthcare coverage beyond the basic coverage that's provided by original Medicare, which is parts A and B, you'll have to choose between either what is called a Medicare Advantage plan or a Medicare supplement plan, sometimes referred to as Medigap. One isn't necessarily better than the other. They each have their place in the market. But in order to make the decision on which one you should go with, you need to have some basic level of financial planning done ahead of time. The route you choose to go can have a significant effect on the potential out-of-pocket costs that you will pay for health care over the remainder of your retirement.

Hello, and welcome back to the Retired-ish podcast. As always, I'm your host, Cameron Valadez, certified financial planner and enrolled agent. Today we are diving a bit deeper into the differences between Medicare Advantage plans, which I will refer to as going forward throughout the episode as MA plans, and Medicare supplement plans, which I will refer to as Medigap for short. Now, these are both forms of additional Medicare coverage that go above and beyond the traditional coverage that original Medicare offers. Now, original Medicare is simply part A and part B. A is for inpatient services, and B is for outpatient services.

00:01:46
Now, in general, original Medicare covers 80% of your health care costs, while you are responsible for the other 20% after the respective deductibles for parts A and B. Keep in mind, however, that 20% you are responsible for can still be a substantial sum of money. There is no cap on that 20%, which is why most Medicare beneficiaries opt for some form of additional coverage, either through Medicare Advantage or a Medicare supplement. I have done previous episodes discussing more of the generalities of Medicare and kind of how Medicare works and what are the different parts.

So, if you're completely new to this, don't worry. I have those old episodes and some detailed blog posts that we've written on the topic, and I will be sure to include a link to those in the episode show notes. So again, if this is completely new to you, you've never heard of Medicare Advantage or supplements, and you have no idea what's going on with Medicare in general, I would start with those episodes and then come back to this one.

When it comes time to choosing one of these forms of additional coverage, you'll want to keep in mind that this decision may be one of the most important ones that you make in retirement, and that's alongside claiming Social Security, for example. And the reason for this is because depending on what path you choose to take, it may be difficult or even impossible to change to a different or better form of coverage down the road if and when you become sick or develop a chronic condition of some sort. If you just haphazardly choose a plan type that is the most convenient for you at the moment, financially, it may cause significant financial issues down the road as you get older and, therefore, require more healthcare. This is why, in my professional practice, we take Medicare planning very seriously, and we make sure that it coordinates with our client's overall financial plans.

So at this point, you probably want to know, should I get a Medicare Advantage plan or a supplement plan? And, of course, even though I hate to say this, it depends, but my goal is to give you the list of things that you'll want to think about when you're trying to decide. That way, you can make an informed decision. So, without further ado, let's dive into the main differences between these two routes, let's call them, starting with Medicare Advantage plans, or, as I said, MA plans for short.

00:04:09
Medicare Advantage plans are offered by various private insurance companies. You have definitely heard of some, if not all of them throughout your lifetime, especially if you watch channels on TV like the Golf Channel, HGTV, Lifetime, et cetera, and the popular news channels since these plans are marketed on TV all the time. You get an MA plan from a particular insurance provider after you have signed up for original Medicare, which again is Medicare part A and Medicare part B.

Once you have an MA plan, you receive care from the plan itself, not Medicare. Many plans nowadays include prescription drug coverage as well, which I will touch on again a little bit later. So again, the primary reason someone would look into getting one of these plans is if they are looking for some sort of additional level of coverage. If you don't have additional coverage when you're on Medicare, you're going to pay 20% of your healthcare costs after deductibles. And again, there's no cap to how large that 20% can be.

This is a form of coinsurance. You are sharing the cost of your care with Medicare. Now, when it comes to MA plans, they are all different, and sometimes they are very different, and sometimes there's an overload of plans to choose from. They offer different benefits and coverage amounts similar to the typical health insurance plan that you're used to seeing that's not Medicare related. There could be premiums, deductibles, copays, and coinsurance.

00:05:44
And as I said, these different costs are not uniform across all of the different MA plans. Now, before we get into the pros and cons of MA plans, I just want to give you a couple of tips. It's important to understand that when you sign up for an MA plan, you will still technically have Medicare parts A and B and a Medicare number, but you will receive your care from your MA plan provider, that insurance company, not Medicare itself. So what this means is that when you go to the doctor and the front desk asks you if you have insurance and you say, yes, I have Medicare, but you have an MA plan, and you give them your red and blue Medicare card, that can actually cause a lot of problems since in that case, they will bill Medicare, not the insurance company that has your MA plan. So remember, on an MA plan you get care through the provider.

So be sure to give them the MA plan card from that insurance company to avoid these troubles and make sure they bill the right place. Now, I know that may sound rather intuitive, but hey, it happens. I thought it was worth mentioning. Also important to know you will continue to pay your premium for Medicare part B even if you're on an MA plan. And although many MA plans are marketed today saying that they have a zero-dollar premium, more on that later. There are some that actually do have a premium. So, if they do have a premium, this is separate from your part B premium.

Okay, so let's get into the meat of these types of plans. What are some of the main benefits of Medicare Advantage plans? Well, first and foremost, there are no health questions when you're signing up for one of these plans. Therefore, it's fairly easy to qualify as long as you apply during a valid election period of some sort. If you have some sort of pre-existing condition or sickness or chronic illness, you can typically still get coverage. Now, next is the fact that they can be a little easier on the wallet when it comes to premiums and when it comes to your monthly cash flow, let's say. And that's at least initially. And I sort of even hate saying that because they can end up being really expensive in the end.

00:07:57
And this is where some financial planning comes into play. As I mentioned, many MA plans are advertised with a zero-dollar premium. While that might be true, I like to say for every gimme, there's a gotcha. And I'll revisit this when we get to the cons in this section. But in general, they can be cheaper than a Medicare supplement plan. Especially if you are fairly healthy and if you're lucky enough not to come down with any sort of chronic illness as you age. Simply said, if you are on a very limited budget or income in retirement, these plans can be friendly in that regard. You may pay higher out-of-pocket costs when you really need it, however, through copays or coinsurance. So think of it as sort of like a pay as you go plan with very little to no premiums. Another pro of these plans is that most, if not all, of your coverage is bundled together.

So many MA plans include your prescription drug coverage, meaning you don't need to go and get a separate, standalone, what we call part D prescription drug plan. Many also offer some dental, vision, and sometimes coverage for things like hearing aids. And when everything is bundled under one provider, you have one MA plan card that you use for basically all of your healthcare needs. So, it checks the box for ease of use, I'd say. Another big selling point to these plans is the auxiliary benefits, let's call them, that they can offer.

These insurance companies get pretty creative with this and can offer additional benefits such as gym memberships and even some allowances for over-the-counter pharmacy stuff as well. They can offer transportation services to appointments, meal delivery in some circumstances, et cetera. Then there are even plans called special needs plans that are geared towards a certain condition, such as diabetes, for example. And they may offer some unique benefits for diabetics.

00:09:57
There are others, but that was just the first one that comes to mind. And lastly, this is sort of a pro and a con. They do have out of pocket maximums on the total amount you will spend from things like copays and insurance if your health was to go haywire. Each plan can set its own maximum, but there is also a maximum amount that they are allowed to set their maximum at. And for 2024, that number is $8,850 a year.

This figure typically adjusts each and every year. Many plans will set their max at that amount since these companies have to make money somehow. There are some companies, though, that do have a lower out-of-pocket maximum, so it just depends on the plan. And again, that max is annual, so each year, you'll reset.

Okay, so let's dive into the cons of MA plans and these are in no particular order. The first I'd say is that MA plans utilize networks of providers. These plans can be HMO plans, PPO plans, or point-of-service plans. As I said, there are many different types of MA plans and different flavors. So this means that each MA plan has its own network of doctors and, specialists and other service providers that you have to use.

If you go out of the network, you may not have coverage, or you will have to pay additional costs. Sometimes these costs are very significant and that's unless it's an emergency. These networks are typically small, and they don't reach across various states. So, if you move away, you'll need to find a new plan with a different network. This is super important because if you have a condition and frequently see multiple different doctors and specialists, some or all may not be in the particular network that your plan offers, which won't work well for you.

00:11:53
And if you travel a lot to visit your kids or your grandkids, or you live the snowbird life in retirement, maybe this may not be great either in case you need care while you are out of network. The HMO plans also require referrals to see your specialists. And also sometimes they want what's called prior authorization for certain procedures that you might need to have done. And because of this, this can cause delays when you're trying to get something done, and it can be very frustrating at times. Next is the fact that these plans have various copays and forms of coinsurance for the various services that they cover.

And this is especially true when you have a plan with a zero-dollar premium. Again, I'll remind you, these companies need to make money somehow. You want to be very mindful of this when you're shopping and comparing these plans because they all vary and sometimes significantly. In order to find this information, when you're looking at plans, you'll need to look for what is called the plan's summary of benefits to know what you might pay in any particular situation.

These copays and coinsurance can sneak up on you, resulting in surprise health care costs. And I don't know about you, but most people I talk to don't like big surprises, especially when it has to do with money. So, for example, you could go to a specialist about certain complaints that you have. Then maybe they say, hey, we want you to get some blood work done, and then they also want you to do some kind of other tests. Now, each one of those services could have separate copays, and then you end up spending hundreds of dollars, maybe more, for that one visit that you didn't expect.

And at the end of the day, you don't want to be afraid to go to your doctor or bring something up because you're afraid of what you might possibly pay. And piggybacking off of that, another con is that these plans can and do change their coverages, copays, coinsurance networks, et cetera, on an annual basis. So, each year, you'll want to review the annual notice of change that they send you. If you don't, you could be surprised to find out that your network was dropped or a certain doctor that you go to leaves the network. This can be extremely frustrating if this happens to you, as you can imagine.

00:14:12
So, I mentioned earlier that the out-of-pocket max is both a pro and a con. Now, here's why. You have to be very careful when thinking about the out-of-pocket maximum. If you become very sick and have a chronic illness like cancer or something, let's say in November of a given year, and you end up spending that full out-of-pocket amount, which is nearly $9,000 right now. It will soon reset after December, and you may immediately max it out again, resulting in potentially very large medical bills very quickly, for which you will have to pay from your other assets. Hopefully, you have some.

And this doesn't even count your out-of-pocket on any medications that have separate thresholds and maximums, which I will touch on a little bit later. And if you have to get that money from, let's say, a pretax retirement account, that will be a taxable withdrawal and potentially mess with your tax situation, too. So you can kind of see how the financial planning comes into play here. These lump sum surprises are what are extremely dangerous to retirees, since many can't just go back to work and make up for it. This is why emergency fund planning, when doing your overall retirement planning, is so crucial. And again, I've talked about that before in previous episodes.

Okay, so circling back, let me go back and touch on the drug coverage piece of this equation. As I said, many plans include drug coverage. However, drug coverage has its own rules, so to speak. Each MA plan will have its own list of drugs that it will help cover. This is called the plan's formulary. Now, MA plans have different formularies, and as I said previously, they can change from year to year. Certain drugs may be covered in one year and then not the next. This is yet another potential con to these plans. The drug plans will have their own out-of-pocket maximum that is separate from the out-of-pocket maximum I mentioned before for the other healthcare needs in the MA plan.

00:16:16
So, if you're taking a lot of medications or you think you will be in the future, you have to account for these potential costs as well. Now, the way the costs work with drug plans is fairly complex, and I won't get into that in today's episode, but just be mindful of that nuance. And lastly, if you go with an MA plan initially, you can't simply try to get better coverage after you get sick or develop some sort of condition. So some people try and start with an MA plan because they are healthy at the time, and then something happens down the road. They get sick, and they start paying a ton of money out of pocket. Then, they want to change to a supplement plan, for example. Not so fast. This isn't likely to happen. So what I always tell people is don't just plan based on your health today, but the potential risks down the road as you age into your later years.

I think that covers a lot for now on the MA plans. So, let's move on to Medicare supplement plans. And again, I'll refer to these as Medigap for short. Remember that Medigap plans are your other route or your other option for additional coverage. That being said, you would never have a Medicare Advantage plan and a Medicare supplement plan. It's one or the other.
Medigap is basically a secondary source of care after original Medicare parts A and B. These plans are also offered by private insurance companies. Similar to MA plans, the premium rates are based on where you live or your zip code, actually your gender, age, and whether or not you use tobacco. Also, a lot of these insurance companies and plans provide potential household discounts if you're married or if your spouse is also getting a plan from the same carrier. Now, unlike MA plans, where your plan, through the insurance company, helps pay for things from the get-go, with a Medigap plan, Medicare original Medicare will pay first, then the plan, the supplement plan, fills the gaps, so to speak.

00:18:26
In this case, the major gap is that 20% that you're otherwise responsible for. Medicare pays their part of the bill, then, the rest of the bills go to the insurance company you got your Medigap plan from, and there are no claim forms to file or anything like that. There are different flavors of supplement plans as well, but not nearly as many as Medicare Advantage. And here's why.

When it comes to Medigap, there are currently ten different plans to choose from, and they are labeled alphabetically. And I know that doesn't help. There are tons of letters of the alphabet in Medicare. I don't know why they label them this way, but they do. And right now, those plans are A through D, F for some people, G and K through N, and each has slightly different coverages. However, coverages are the exact same across the different insurance companies. So the easy way to think of that is that a plan G is a plan G. A plan N is a plan N. The only difference between getting a say, plan G supplement at an insurance company A versus insurance company B is the premium that they want to charge and maybe small differences in customer service.

That being said, this market is also very competitive because they're competing on price on premium. Now, depending on which supplement plan you choose, you could have very predictable out-of-pocket costs as well as extremely comprehensive coverage. So, just like we did with MA plans, let's get into the pros of Medigap to help further illustrate this for you. The first one I want to mention is the major difference in how these plans work compared to MA plans. With Medigap, there aren't any networks.

00:20:14
You go see whatever doctor you need to at whatever hospitals, as long as they accept Medicare, which most do across the country. This is true, like I said, across the nation. You also don't need any referrals to specialists. So if you have a condition where you have five different doctors, four of them specialists, you don't need to worry about who's in what network. And will I always have to get referrals back and forth?

None of that with Medigap. This makes them very flexible and definitely good for traveling and can provide peace of mind knowing that you can choose who to get care from when you need it. Now, as I mentioned, most of the Medigap plan choices cover that 20% coinsurance that you are responsible for after Medicare part A and part B pay 80%. Coinsurance is the area where people often get these lump sum surprise medical bills, so this helps alleviate that risk pretty well. And most of the Medigap plans cover all of the copays as well if you want that coverage. I say most because there are some that don't.

The maximum amount that you will spend in a given year is typically your part B deductible, which is a few hundred dollars right now, and the premiums for part B, as well as the premiums for the Medigap plan itself. The rest of your potential costs, such as copays and coinsurance, are typically covered by most of the popular Medigap plans. This makes these plans great candidates for retirees who have an actual income plan in retirement. And this is because these costs can be budgeted for ahead of time. So you can see whether or not you can afford one of these plans for the rest of your life.

00:21:59
If so, you can significantly mitigate the risk or the threat of those surprise out-of-pocket expenses at some point down the road. Also, similar to MA plans, there is no medical underwriting if you sign up on time when you're eligible. If you are outside of one of those periods, you will have underwriting, and you might be denied. So you need to be careful there. Additionally, some Medigap plans provide foreign travel emergency coverage when you are outside of the US traveling and enjoying life in retirement. The particular Medigap plans that offer this coverage will cover 80% of the costs for emergency services after you've paid your deductible, just like with anything else. All right, so this all sounds good. Now give me the cons of Medigap.

Okay, here we go. All right. The number one con. Now, this is only in the context of comparing Medigap to Medicare Advantage, and this is that Medigap plans have higher premiums. This is obviously the case when there are MA plans that literally don't charge a premium at all, right? And each letter plan has a different premium. But for the more comprehensive and popular plans, which right now are plans G and plan N, and in certain cases plan F, expect the average monthly premium range to be anywhere from one hundred and twenty dollars to one hundred and seventy dollars a month in most states.

Some states have higher rates than others. So, though this is a con when compared to Medicare Advantage plans, when you compare it to the cost of health insurance before you were eligible for Medicare, it may look like a pretty good deal still. Now, notice that when it comes to Medigap, I haven't mentioned prescription drugs yet. That's because this is one of the major cons when you go the Medigap route.

00:23:53
Or I wouldn't even say major, but it is a con. Simply put, these plans don't include drug coverage. So what you have to do is you have to go buy a standalone part D prescription drug plan, which isn't that hard. But then you will have two different cards that you use for care and possibly totally different insurance companies, right? You could have your Medigap plan with insurance company A, and you could have your prescription drug plan with a totally different company. So again, one for your general healthcare needs and one for prescription drugs.

Now, when you have a standalone drug plan, they work very close to the same as the drug plans that are included with many Medicare Advantage plans. Each plan has its own drug formulary or the list of drugs that they will cover. They have different premiums and they also have different copays as well. So other than having a separate provider for your drug coverage, there aren't many differences with the drug plans on their own, or whether or not they're included in an MA plan.

In addition, supplement plans don't offer dental, vision, and hearing coverage, so these two or three things need to be purchased separately. Now, there are companies that sell standalone insurance to retirees for these, and I'll give you a tip. Another popular place to get these coverages if you need them is through a place like Costco. Maybe sometimes they have some good programs. The other thing I'd say about dental and vision is that there are many cases where you may not even need that coverage.

Just because while you are working, your employer's healthcare plan provided you dental and vision coverage doesn't mean you actually need it. Sometimes, the benefits just aren't rich enough to make sense, or the juice isn't worth the squeeze. Lastly, I'd say that a potential con of Medigap is that you will likely need to have medical underwriting if you don't join when you're supposed to via your open enrollment when you're approaching age 65, and you're Medicare eligible or via a special enrollment period if you had coverage from another source and maybe you worked beyond age 65. When they do this underwriting, they typically look at anywhere from two to five years of health and prescription drug history. So the bad part is you could be denied.

00:26:12
If you're denied and have to go to an MA plan and you have a serious condition, you could be forced into paying those out-of-pocket maximums every year, which could be financially devastating. So, I think I've covered the biggest topics when trying to compare these different routes of coverage. But of course, there are some others that I may not have reviewed or didn't review. When deciding which to go with, you will need to have an idea of what you can afford, where you will be located in retirement, and whether or not you'll be traveling a lot. And, of course, you'll need to assess your current healthcare needs as well as potential future needs.

I can't stress that second part enough. Don't forget about what could potentially happen in the future. Even if you're really healthy today, remember that insurance is a form of risk management. It is a big piece of the risk management part of your financial planning puzzle. Ideally, you want to pay for the coverages that will protect you from the most financially devastating situations and that you can afford, of course.

The types of retirees that my firm often works with who have either saved for retirement on their own or have some sort of pension typically opt for Medicare supplement plans, aka Medigap versus Medicare Advantage plans. Now, that's not always the case, but just in my experience and the type of people I work with, the majority of them do go with Medicare supplement plans, and that is simply because we have done adequate retirement income planning and factored in the potential healthcare costs over their retirement. And having a supplement plan with fairly predictable costs makes planning easier for them. And they already know, due to their income plan, that they will be able to afford it for the long haul. They prefer this over random variable copays, coinsurance, or catastrophic charges should they get sick at some point in the future.

00:28:15
They like knowing their assets will be protected and will be utilized for their other goals like retirement income, maybe legacy planning for their spouse and their heirs, charitable giving, et cetera. But this all, of course, depends on your exact situation. I am not by any means saying that Medicare supplement plans are better than Medicare Advantage plans, not at all. There is definitely a time and place for each different one and depending on your situation.

So you need to ask yourself, what coverage goals do you have? Do you go to the doctor a lot, or are you healthy right now? How many doctors and specialists do you have? What is your budget right now, and will it be more or less in the future? Right? Are you going to have more income in the future from some source? Is your income going to be deteriorating? Do you have an adequate emergency fund that is not in a pretax retirement account? These high-level questions can help you decide which route to go before you spend copious amounts of your time comparing the different plan options.

That's about it for today's episode. If you are concerned about your Medicare planning and you want some guidance or need to dial in a retirement income plan beforehand, of course, you can reach out to our firm, Planable Wealth.

We are an advisory firm that does comprehensive retirement planning for retirees, and Medicare planning is a big part of that. We can help you do your analysis and sometimes even shop and compare plans with you and walk you through the entire process, soup to nuts. In addition, if you check out our website at retiredishpodcast.com, we are offering a free download for my firm's retirement planning quick guides, which include multiple flowcharts and different resources to help you make decisions and implement some of the things that we discuss on the podcast when you join our monthly Retired-ish newsletter. So be sure to check that out if you haven't already.

00:30:14
Plus, you'll learn a ton about retirement planning from the newsletter itself. Once a month, easy to digest information right to your email inbox. No spam. If you can spare a minute of your time and you find this information actionable and insightful, please subscribe to or follow the show on your podcast app and share it with a friend who you think it might benefit. If you'd like to learn more about the topics that we discussed in today's show, you can find the links to the resources we have provided in the show notes right there on your podcast app. Or you can just visit us at retiredishpodcast.com/39. Thanks again for tuning in and following along. See you next time on Retired-ish.

Securities and advisory services are offered through LPL Financial, a registered investment advisor, member FINRA, SIPC. The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA.

In addition, if you are required to take a required minimum distribution, RMD, in the year you convert, you must do so before converting to a Roth IRA. Investing involves risk, including the potential loss of principle. No investment strategy can guarantee a profit or protect against loss. Past performance is not a guarantee of future results.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise, and bonds are subject to availability and change in price. Government bonds and treasury bills are guaranteed by the US government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value.

Treasury inflation-protected securities, or TIPS, are subject to market risk and significant interest rate risk as their longer duration makes a more sensitive to price declines associated with higher interest rates. Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free, but other state and local taxes may apply. If sold prior to maturity, capital gain tax could apply.

Neither LPL Financial nor its registered representatives offer tax or legal advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation.
Asset allocation does not ensure a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.