Medigap: A Beginner's Guide

What is medigap?

Medicare, which began in 1965, was never intended to completely cover healthcare expenses. But with Medicare now paying for only about half of all healthcare costs for people age 65 and over, there's clearly a need for additional coverage to pay for what Medicare doesn't.

Enter medigap, a set of government-regulated supplemental private health insurance plans. Medigap is designed to bridge the gap between what Medicare pays and what people wind up having to pay out of their own pockets -- like the $1,024 Medicare deductible for hospitalization and the 20 percent Medicare copayments for doctor visits, just to name two of the most prominent.

Medigap policies (which Congress standardized in 1992 and revised in 2006) are issued through private insurance companies. Although the details of the policies -- and their premiums -- vary from company to company, each insurance company that issues them may offer only the same standard plans with the same basic benefits.

Here's what you need to know about medigap when evaluating whether it makes sense for your parents:

What are the medigap plans and what do they cover?

By law, companies can offer only 12 standard medigap insurance plans -- plans labeled A to L -- though a company doesn't have to offer all 12. Each plan has its own standardized set of benefits or payment options, regardless of which company sells it. However, premiums for the same plan vary among companies and geographic areas. You'll want to study the benefits offered by each of the 12 plans, as well as the premiums charged by each company and the terms under which those premiums may be raised over time, before deciding whether a policy makes good sense for your parents. And if your parents regularly spend time in more than one state, you'll also want to make sure the policy would cover them in either place.

All 12 medigap policies cover certain basic benefits -- including copayments for Medicare Parts A and B -- but each plan has different additional benefits. Plan A is the most basic. Plan B offers everything in Plan A, and also covers the deductible for Medicare hospitalization. Plan C covers everything in Plans A and B, as well as the deductible for outpatient care and some healthcare outside the United States. And so it goes up to Plan J, which covers all Medicare deductibles and much preventive care.

Plans K and L work a little differently from the others. They cover most gaps in Medicare coverage but pay only a percentage of those costs. They make up for these reduced payments by placing a cap on an insured's total out-of-pocket costs. After the cap is reached, these policies pay 100 percent of all covered costs.

Are my parents eligible for medigap?

Your parents can only purchase medigap supplemental insurance if they're enrolled in traditional Medicare Part A and Part B, which pay for hospitalization, doctor visits, and other outpatient care. If, on the other hand, they've enrolled in a Part C Medicare Advantage managed care plan, they don't need, and aren't eligible for, a medigap insurance policy.

Do my parents need medigap?

It's difficult for anyone over age 65 to get private healthcare coverage that isn't exorbitantly expensive, so for most people of that age, Medicare is the only health insurance option that makes sense. But out-of-pocket costs under Medicare can easily add up. Between copayments, deductibles, premiums, and coverage gaps, your parents can easily spend several thousand dollars each year on their healthcare, even with Medicare. If your parents currently spend a lot on items that a medigap plan would cover, particularly if those costs are rising each year, it makes sense to compare different plans to see if one of them could save your parents money.

If your parents qualify for Medicaid (government health insurance for low-income people), they don't need to buy a medigap policy, because Medicaid pays for most expenses that Medicare doesn't pay.