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CPA INSIDER

High-deductible Medigap plan makes sense for some

A Medicare beneficiary at the ‘break-even’ age may benefit from switching to a high-deductible policy.

By James Sullivan, CPA/PFS
March 19, 2018

Please note: This item is from our archives and was published in 2018. It is provided for historical reference. The content may be out of date and links may no longer function.

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The Annual Enrollment Period isn’t the only time Medicare beneficiaries can make changes to their coverage to better meet changing financial circumstances. Participants in traditional Medicare can make changes to their Medicare Supplement (or Medigap) coverage any time during the year for any reason. One such change you may recommend to your clients is moving from traditional Medigap Plan F (Medigap F) to a high-deductible Plan F (Medigap High-F).

Medigap F provides the most comprehensive coverage of the current Medigap plans offered. With Medigap F there are no annual deductibles and no out-of-pocket costs for procedures covered by Medicare. Because it offers comprehensive coverage, its monthly premium is the highest when compared to the other Medicare Supplement plans. Despite its high premium, it is the most popular Medigap plan.

Medigap High-F has been available for several years. It provides the same coverage as Medigap F but has much lower premiums. However, it does have an annual deductible of $2,240 in 2018.

How does it work? Medicare Parts A and B continue to pay covered costs first. For example, if you go to your primary care physician and the Medicare-approved cost of the visit is $100, Medicare Part B will pay 80% of the cost or $80. (See table below.) Under Medigap F, the policy will pay the balance owed of $20 leaving the client with no out-of-pocket (OOP) costs. Under the Medigap High-F, if the client has not yet reached the annual deductible of $2,240, he or she would pay the $20 OOP cost. The Medicare beneficiary will continue to pay the amount that Medigap F would have paid for medical services until his or her total OOP costs reach $2,240.

Medigap F comparison


Many Medigap High-F policyholders are unlikely to reach the annual deductible of $2,240. But the risk of paying that much OOP costs still exists, especially if a policyholder is in poor health.

When Medigap High-F plans may be a good choice

There is one way for a client to move to Medigap High-F without being “at risk”: by switching to Medigap High-F once he or she has reached the “break-even” age.

At certain ages a client’s annual savings in Medigap High-F premiums compared to Medigap F premiums will exceed the annual deductible. This is what is referred to as the “break-even” age. In the example below, age 81 is used to illustrate the point, but the break-even point can be lower for some beneficiaries, depending on Medigap prices and the state they live in.

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For an 81-year-old woman, the annual premium cost of Medigap F from a large, financially strong insurance company in a Midwestern state is $3,084. The annual premium cost of the same company’s Medigap High-F is $847.08 for a total cost savings of $2,236.92. The annual deductible in 2018 is $2,240, or within a few dollars of the break-even point. Therefore, it may make sense for this client to switch to a Medigap High-F plan, especially if she is in good health and anticipates spending less than the deductible in health care costs.

The savings increase after age 81. At age 85 the difference between the Medigap F premium ($3,840) and the Medigap High-F premium ($1,224) is $2,616, greater than the annual deductible.

Savings comparison


Even if a client is younger than the break-even age, a Medigap High-F plan may still make sense. It does mean that the adviser should perform aareful analysis of the potential savings from selecting a Medigap High-F plan and determine the amount the client is “at risk.” For example, a 72-year-old female client may purchase a Medigap F for $2,808 per year. A Medigap High-F plan from the same provider in her state would cost $864. The $1,944 in premium savings is less than the annual deductible of $2,240. But if your client considers herself in good health, she may decide that the amount she would save by choosing a Medigap High-F plan is worth chancing the “at risk” amount of $2,240 minus $864, or $1,376.

Finances aren’t the only factor to consider during Medicare planning

In other cases, clients may want to switch to a Medigap High-F plan for reasons other than money.

For example, one client’s 96-year-old mother participated in a Medicare Advantage (MA) plan with a monthly premium of $25 ($300 per year). The MA plan included prescription drug coverage. MA plans include various co-payments and co-insurance the beneficiary must pay out-of-pocket. MA plans must have an overall annual OOP cost limit, but these limits are usually very high at $3,600 or more.

However, the mother was homebound and depended on her daughter to take her to doctor’s appointments. The MA plan had network restrictions limiting the health care providers that beneficiaries could use. Its service area was limited to the county in which the mother lived so seeing a doctor nearer to her daughter’s home in another county was not possible. By moving from her MA plan (during the Annual Enrollment Period) to traditional Medicare plus a Medigap High-F, the mother could select a new doctor very close to her daughter’s home.

In this case, cost was important, but a secondary consideration. However, the client’s mother still saved money by choosing a Medigap High-F over a Medigap F. A Medigap F would have cost her $4,164 per year. The Medigap High-F would cost $1,320. The savings can be calculated as follows:

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Annual premium cost of traditional Plan F  $4,164

Less: Annual premium cost of Medigap High-F  ($1,320)

Plus: Savings from dropping the MA plan*  $300

Total savings before the annual deductible  $3,144

*Premium of $25 monthly or $300 per year; does not include the MA plan co-payments and co-insurance amounts.

With the annual high deductible in 2018 of $2,240, the client’s mother was not at risk given the overall savings in monthly premium costs. The OOP costs of her Medicare Part D standalone plan (including the annual deductible, co-insurance, and co-payments) given her current prescription drugs were approximately the same as prescription drug coverage under the MA plan. All else being equal, the move to traditional Medicare with a Medigap High-F and a standalone Part D plan provided a net savings.

As these examples illustrate, proactive Medicare planning can often result in better coverage and cost savings as your client’s health and financial circumstances change.

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James Sullivan, CPA/PFS, is a financial planner in Wheaton, Ill. He specializes in working with clients, and the families of clients, suffering from chronic illness. To comment on this article or to suggest an idea for another article, contact Courtney Vien, a JofA senior editor, at Courtney.Vien@aicpa-cima.com.

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