Only The Rich Can Afford Medicare Supplements

 

I’ve said it before and I’ll say it again, only the rich can afford Medicare Supplements. This, of course, is not true. But it is also, kind of very true. Let me explain.

When you first enroll into Medicare Part B (for most people that is at age 65), you have many choices to supplement government health care. For 45 years, those choices were almost always some type of Medicare Supplement (also known as Medigap) plans A – J. Most people prior to 2020, choose a Plan F. 

Today, people in their late 70s are often paying around $350 per month, or more, for their Medicare Supplement plan that cost about $100 a month when they were 65. Add on to that the cost of Medicare Part B (which you must have to purchase a supplement) which is about $170 per month for most people. You’ll also have to choose a prescription drug plan, which can be $20-$30 per month. Lastly, and this is where the money adds up quickly—you pay a co-pay per medication you take. If you are on several name brand drugs, your co-pays could be between $60-$90 per drug, per month.

 

Estimated Monthly Cost

This typical person in her late 70s now has an estimated total monthly cost of $450 before we factor in the cost of any prescriptions. The beauty of a Medicare Supplement Plan F is that there is no additional out of pocket cost. No deductible. No co-pay to see a doctor and no extra charge for surgery or therapy.

A typical Medicare supplement plan will go up 5-10% a year for the rest of your life. As inflation erodes the buying power of your retirement, your fixed Medicare costs keep going up. 

Private Medicare Advantage plans are an alternative. The industry expects half of all retirees to be on a private plan in the next few years. These types of plans offer the hope of lower month cost. Many Advantage plans have no monthly cost (other that your Medicare Part B). For the healthy, they might go all year and have nothing out of pocket.

 

Real Life Example

I have a client turning 90 who is nervous now that he is “stuck” on a Medicare PPO plan. By stuck, he means that he is unable to return the expensive Medicare Supplement Plan he had for years. The plan that finally cost too much and forced him over to Medicare Advantage.  His Plan F and drug plan together cost him $450 a month. His total risk is $5,400. If he never uses his insurance all years, his fixed cost is his monthly premium x 12. If he goes to the doctor once, that visit also costs him $5,400. Private Medicare has a maximum annual out of pocket. That is your protection. You may have access to a plan with a low total risk, say $5000. On this type of HMO, once you pay $5000 out of pocket in total copays, you won’t pay anything for the rest of the calendar year.

As your Medicare Supplement plan increases in price, it makes a Medicare Advantage plan more of a comparable financial risk. There are other factors that vary between these two types of plans (network restrictions, extra benefits) but for a purely financial comparison, older people with a heft, fixed monthly cost for their Plan F or G might be able to save money on a PPO or HMO plan.

 

What Happens at Age 65?

At age 65, you can get any Medicare Supplement plan from any insurance company. They cannot ask you about your health or charge you more for your medical conditions. Companies artificially lower their rates at 65 to get you to choose them in a tight price war. In other words, Medigap plans are on sale when you first purchase them.

Keep in mind that the rates going up are not based on your health. It’s based on the health of everyone who bought your plan. Rates will go up due to medical inflation and regular inflation. Each insurance company goes up at a different rate, and therein lies the magic of a good insurance advisor. An experienced advisor can relay the past performance of the options you are considering and give you an educated opinion about the speed at which your plan will increase in price. 

 

Only the Rich Can Afford Medicare Supplements – Kind Of

While many people start out with a Medicare Supplement plan, due to the perennial rate increases, most people eventually switch to Medicare Advantage. The rich afford these plans and weather the rate increases. Those that are not rich but sick, are often willing to sacrifice to keep an expensive Medicare Supplement. The rest of the people in the middle, generally tend to tire of the rate increases and migrate to private Medicare plans.