Medicare Supplement Insurance: Definition, Types & Cost

If you ever have the chance to watch daytime TV, you’ll see many commercials geared towards people who are 65 years of age and older. One of the most frequently advertised products is Medicare Supplement Insurance.

 Jump ahead to these sections:

• A Crash Course on Medicare
• What Is Medicare Supplement Insurance?
• What Are the Different Types of Medicare Supplement Plans?
• How Much Does Medicare Supplement Insurance Cost?
• How Do Premiums and Payouts Work With Medicare Supplement Insurance?
• Advantages of Medicare Supplement Insurance Plans

Three months before someone turns 65, they’re notified by the Centers for Medicare and Medicaid Services that they are now eligible for Medicare insurance coverage, and coverage will start the day they turn 65. This gives them three months to research and customize their Medicare coverage.

One of the biggest decisions is buying a Medicare Supplement insurance policy that provides benefits that basic Medicare doesn’t. The policy fills in the gaps that the government’s Medicare program doesn’t pay for, which is why it’s commonly referred to as a “Medigap” plan.

Not only is Medicare challenging to understand, but so is Medicare Supplement insurance. This article will take a deep dive into Medicare Supplement insurance, the different types, premiums and payouts, and more. 

This information could be confusing if you don’t have a basic knowledge of Medicare, so let’s start there and then examine Medicare Supplement insurance.

A Crash Course on Medicare

Medicare is a federal health insurance program for three types of people:

1. People who are age 65 or older
2. People younger than 65 with disabilities
3. People with End-Stage Renal Disease (ESRD) who are experiencing kidney failure and require dialysis

There are three different parts of Medicare that help with covering specific services:

Medicare Part A (Hospital Insurance): Covers inpatient hospital stays, skilled nursing facility care, hospice care, and a portion of home health care costs.

Medicare Part B (Medical Insurance): Covers certain doctor’s services, outpatient care, preventive services, and medical supplies.

Medicare Part D (prescription drug coverage): Helps pay the cost of prescription medications (including many recommended vaccines and shots).

Now that you have a basic understanding of Medicare, let’s add a few more ingredients: Medicare Advantage (also known as Part C) and Medicare Supplements.

Private health insurance companies provide Medicare Advantage plans and were developed to replace Original Medicare (Parts A and B) as your primary insurance. Advantage plans offer the same coverage as Medicare parts A&B, but many also provide additional benefits like vision, hearing, some dental, and fitness coverage. In addition, most Advantage plans also include Part D prescription drug coverage. 

Medicare Supplement insurance is a direct competitor of Medicare Advantage plans. You’ll need to select one or the other; you can’t carry both. 

What Is Medicare Supplement Insurance?

Private heathy insurance companies offer Medicare supplement plans that were initially designed to help fill in the gaps of Medicare Parts A and B. It pays for things like co-payments, coinsurance, and deductibles. 

It differs from Medicare Advantage plans in that those plans replace Parts A and B, while Medigap policies only supplement them.

There are three significant differences between Medicare Advantage Plans and Medicare Supplement plans.

First, most Medicare Advantage Plans include Part D prescription drug coverage. If you choose one that doesn’t, you can buy a stand-alone Part D plan. No Medicare Supplement plans include Part D.

Second, Medicare Supplement plans allow you to choose the doctors and hospitals you want to utilize. With Advantage Plans, you’ll have to use providers on a list the insurer provides you. You’re not required to use a PPO or HMO network; any provider is acceptable. 

The third difference is the out-of-pocket cost. Advantage plans are primarily $0 deductible plans, while Medicare Supplement insurance plans have deductibles and out-of-pocket maximums, making them a more expensive alternative compared to Advantage plans.

What Are the Different Types of Medicare Supplement Plans?

The chart shown below gives you a quick look at the Standardized Medicare Supplement insurance plans available. These are some of the nuances, courtesy of medicare.gov: 

•  Insurance companies selling Medigap policies are required to make Plan A available. If they offer any other Medigap policy, they must also offer either Plan C or Plan F to individuals who are not new to Medicare and either Plan D or Plan G to those new to Medicare. Not all types of Medigap policies may be available in your state. 
• Plans D and G, with coverage starting on or after June 1, 2010, have different benefits than Plans D or G bought before June 1, 2010. 
• Starting January 1, 2020, Medigap plans sold to people new to Medicare weren’t allowed to cover the Part B deductible. Because of this, Plans C and F were no longer available to people new to Medicare on or after January 1, 2020. 
• If you already have either of these two plans (or the high deductible version of Plan F) or were covered by one of these plans before January 1, 2020, you'll be able to keep your plan. If you were eligible for Medicare before January 1, 2020, but not yet enrolled, you may be able to buy one of these plans. 
• People new to Medicare are those who turned 65 on or after January 1, 2020, and those who got Medicare Part A (Hospital Insurance) on or after January 1, 2020. 

Plans F and G also offer a high‐deductible plan in some states. With this option, you must pay for Medicare‐covered costs (coinsurance, co-payments, and deductibles) up to the deductible amount of $2,340 in 2020 before your policy pays anything. (Plans C and F were no longer available to people who were newly eligible for Medicare on or after January 1, 2020.) 

**For Plans K and L, after you meet your out‐of‐pocket yearly limit and your yearly part B deductible ($233 in 2020), the Medigap plan pays 100% of covered services for the rest of the calendar year. 

*** Plan N pays 100% of the Part B coinsurance, except for a co-payment of up to $20 for some office visits and up to a $50 co-payment for emergency room visits that don’t result in an inpatient admission. 

How Much Does Medicare Supplement Insurance Cost?

According to valuepenguin.com, in 2022, a Medicare Supplement plan costs an average of $163 per month. However, costs will depend on two factors: the policy you select and your state’s pricing structure.

Different plan letters have different prices since each policy provides a different level of coverage. For example, Plan G, a more comprehensive plan, costs more than Plan K, a less expensive plan offering less coverage. 

Below are the average monthly premiums of each Medicare Supplement plan for 2022. A range is given since costs vary. Here is a look at the monthly premium for a 65-year-old female nonsmoker.

Medicare Supplement insurance prices will differ based on state regulations and whether or not the plan is allowed to base rates on age or health status. There are three different ways in which Medicare Supplement policies can be priced:

•  Community-rated
• Issue-age-rated
• Attained-age-rated

The most straightforward rating system is community-rated, meaning that the same monthly premium is charged to everyone who has the same type of Medicare Supplement policy. Premiums won’t be based on your age, but inflation could cause a rate increase.

Issue-age-rated has a premium structure in which your monthly premium is based on the age you are when you buy the Medigap plan. As is the case with most types of insurance like life and health insurance, premiums will be lower for people who buy at a younger age. For example, if you purchased a Medicare Supplement policy at age 65, your premium could be $250, but if you bought the same plan at 80, that policy might cost $325.

The final pricing structure is attained-age-rated. With attained-age-rated pricing, the monthly premium is based on your current age every year. In other words, your premium will renew annually and increase as you continue to get older. For example, you may have started paying $175 monthly for your Medicare Supplement policy at age 65, but by the time you are 80, you could be paying $225 per month.

Differences in pricing structure can dramatically change the amount you'll pay for Medicare Supplement insurance coverage during your lifetime. When pricing is based on attained age, costs will lower at age 65 and rise higher over time. If you have a community-rated plan, you'll see higher rates at age 65, but the cost increases won't be as severe.

How Do Premiums and Payouts Work With Medicare Supplement Insurance?

Premiums and payouts for Medicare Supplement Insurance work much the same for health insurance. Premiums are typically auto-deducted from a bank account or billed quarterly, semi-annually, or annually. 

The insurer processes a claim after it has been filed by the insured or the service provider. Most often, the provider will bill the insurance company directly after the insured has paid any deductible or co-payment due at the time of service.

Advantages of Medicare Supplement Insurance Plans

When you enroll in Medicare, you’ll need to decide if you’re going to enroll in a Medicare Part C Advantage Plan (described above) or a Medicare Supplement insurance plan.

These are five features of Medicare Supplement plans that some people find advantageous:

1. Predictable out-of-pocket costs: When selecting your Medigap plan, you can choose a low or no out-of-pocket copay, coinsurance, or deductible. 
2. Guaranteed coverage for life: Even if your health changes, your coverage won’t. Plan features stay the same every year.
3. Complete coverage: A Medicare Supplement plan combined with Medicare Parts A and B and a Part D prescription drug plan provides you with full coverage.
4. Keep your doctor: This is the number one reason many people have for selecting a Medigap plan over a Part C Advantage plan. You can choose any doctor or hospital that accepts Medicare patients, and you never need a referral to see a doctor or specialist.
5. Coverage when you travel: Medicare Supplement insurance plans can be used anywhere you travel in the United States; you’re not limited to a particular region or physician group.

Use a Medicare Specialist When Buying Medicare Supplement Insurance

As you can tell, there are many moving parts when it comes to Medicare enrollment and coverages. You have to be sure you’re applying at the right time, and you have to select from a multitude of options to ensure you have the best plans and coverage to meet your needs. 

For that reason, many financial advisors recommend that you consult with an insurance agent who understands the Medicare Supplement insurance plans they sell and knows the ins and outs of Medicare itself. They can guide you through what can be a rigorous and stressful enrollment process.