Like any massive insurance enterprise, Medicare is confusing. Medicare.gov will give you hundreds of pages of explanation, but luckily, the basics of the program aren’t difficult to grasp. As the cliché goes, however, the devil is in the details.

Medicare has four basic parts – A, B, C and D. If you’re unfamiliar with how they work, read Medicare 101: Do You Need All 4 Parts? Taken together, Parts A (hospital care), B (doctors, medical procedures, equipment) and D (prescription drugs) provide basic coverage for Americans 65 and older. What's relevant for this article is what these parts don't cover – deductibles, co-pays and other medical expenses that could wipe out your savings should you become seriously ill. That's where Part C comes in. Also known as Medicare Advantage, it's one of two ways to protect against the potential high cost of an accident or illness. Here's what could happen.

You Have to Plug the Holes

Let's say you have only Parts A, B and D. Here's what the holes or “gaps” in coverage could do to your budget if you were admitted to the hospital for, say, heart surgery, and complications required you to have a long hospital stay followed by needing regular medication after it:

At the hospital: Because of the Part A deductible, you’d pay the first $1,216. After 60 days, you will start paying a portion of each day's cost.

For doctors and medical procedures (Part B) at the hospital and at home: You would pay 20% of all costs after meeting your $147 deductible. Unlike many other health insurance policies, there is no cap or maximum out-of-pocket amount on what you could owe. The American Heart Association says that the average cost of heart surgery is $62,509 – in that case, your Part B copay would be over $12,000.

Because of how Part D works, you could pay as much as 72% of the cost of some of your prescription drugs if you need enough medication to push you into the notorious doughnut hole: when Part D's full prescription-drug coverage runs out after you've spent $2,850, until your medication costs exceed $4,550 per year. In 2015, coverage will end at $2,960 and begin again at $4,700. During the coverage gap, you'll be responsible for 47.5% of covered, brand-named prescription drugs. In 2015, that will change to 45%.

These coverage gaps mean that a particularly bad health year could leave you with tens of thousands of dollars in hospital bills. That's why most people purchase Medicare supplement insurance – also called Medigap – or enroll in Part C, a Medicare Advantage Health Plan. Both options are offered by private insurance companies. They do, however, have to follow Medicare guidelines in what they are allowed to sell.

Option 1: Medigap

Medicare Supplement Insurance, also called Medigap coverage, will protect people who buy traditional Medicare against many of the costs described above. In return, Medigap charges a premium that is in addition to what you already pay for Medicare Parts A (many people get this free), B and D.

Just to make life truly confusing, the various options offered by Medigap are also sorted by letter. Your choices are Plans A, B, C, D, F, G, K, L, M and N. What these plans include is standardized by Medicare. What you pay for them can vary, however, so it's worth shopping around. Joseph Graves, insurance agent and Founder of “I Hate Buying Insurance,” says many people enroll in Plan F, the most expensive choice, because it covers nearly all the gaps. A person with Plan F coverage will have few or no out-of-pocket expenses. A healthy person living in Florida would pay about $289 per month for Plan F coverage as of 2014, according to Graves.

Medigap policies will cover you whenever you see any doctor or facility that takes Medicare. If the doctor or facility does not accept Medicare patients, Medigap won't cover any of those costs, even though it is a private insurance policy. You can find a Medigap policy here.

Option 2: Medicare Advantage

A Medicare Advantage Health Plan (Medicare Part C) may provide more help at a lower cost than traditional Medicare plus Medigap. Instead of paying for Parts A, B and D, you enroll through a private insurance company that, in many cases, covers everything provided by Parts A, B and D and may offer additional services. You pay the Medicare Advantage premium along with your Part B premium in most cases.

Medicare Advantage Health Plans are similar to private health insurance plans. With most plans, services such as office visits, lab work, surgery and many others are covered after a small co-pay. Depending on what’s available in your area, plans could offer HMO or PPO network plans and place a yearly limit on your total out-of-pocket expenses.

Also like private plans, each has different benefits and rules. Most provide prescription drug coverage; some may require a referral to see a specialist while others won’t. Some may pay some portion of out-of-network care, while others will only cover you for doctors and facilities that are in the HMO or PPO network.

Compare plans by going to Medicare.gov’s plan finder.

Which is Better for You?

It is illegal for an insurance company to sell you both a Medicare Advantage and a Medigap policy. Three things to consider before choosing which one to get:

Cost: Medigap coverage usually has a higher monthly premium, but could result in lower out-of-pocket expenses than some Medicare Advantage plans. Medicare Advantage plans, on the other hand, generally cost less and cover more services, which can be the better option for your budget.

Choice: Medicare Advantage plans generally limit you to the doctors and facilities within the HMO or PPO, and may or may not cover any out-of-network care. Traditional Medicare and Medigap policies cover you if you go to any doctor or facility that accepts Medicare. If you require particular specialists or hospitals, check whether they are covered by the plan you select.

Lifestyle: Medicare Advantage plans often only operate with a certain region. If you’re a snowbird living in more than one state throughout the year, traditional Medicare plus Medigap is probably a better choice than an Advantage plan. This may also be true if you travel frequently: Some Medigap plans provide coverage when traveling outside of the United States and cover you in all 50 states; Advantage plans generally do not.

The Bottom Line

Figuring out the Medicare plan that's most appropriate for your needs is probably not a do-it-yourself activity. Once you understand the basics of Medicare, get some help.

Medicare.gov provides tools that will allow you to compare plans, but the decision is complicated. Insurance agent Graves recommends that you “work with a licensed insurance agent who can show you both Medicare Supplement Plans and Advantage Plans from multiple companies. Each type has its positives.” The questions to cover, he says: “You need to understand the costs, doctor networks, coverage levels and maximum out-of-pocket for each. Enroll in what suits your situation best.” Organizations such as Consumer Reports and the Medicare Rights Center can also help you research your decision.

Related Articles
  1. Retirement

    Medicare 101: Do You Need All 4 Parts?

    At age 65, most people have to sign up for Medicare. Learn which of its four programs are mandatory – and which you can skip.
  2. Retirement

    Five Distinct Features of Medicare Advantage

    Should seniors opt for the flexibility of Medicare or the often broader coverage or lower cost of Medicare Advantage programs through a private insurer? Consider the following.
  3. Options & Futures

    Getting Through The Medicare Part D Maze

    Having trouble sorting through your prescription drug coverage options? We offer some solutions to the confusing process of selecting the right Medicare Part D coverage for you.
  4. Insurance

    What Does Medicare Cover?

    Don't assume you're insured. Find out what you can expect from this healthcare program.
  5. Insurance

    Filling In The Medicare Gaps

    Basic Medicare is not a perfect fit for everyone - sometimes, extra policies are required to suit a person's needs.
  6. Investing

    Five Things to Consider Now for Your 401(k)

    If you can’t stand still, when it comes to checking your 401 (k) balance, focus on these 5 steps to help channel your worries in a more productive manner.
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  8. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  9. Retirement

    The World's Most Luxurious Retirement Destinations

    If money is no object (or if you would just like to dream), these five spots are the crème de la crème.
  10. Professionals

    How to Protect Elderly Clients from Predators

    Advisors dealing with older clients face a specific set of difficulties. Here's how to help protect them.
RELATED TERMS
  1. Medicare Doughnut Hole

    A range of total prescription drug spending in the Medicare Part ...
  2. Medicare Advantage

    Hospital and medical insurance provided by private companies ...
  3. Medicare Supplementary Medical ...

    Health insurance sold by private insurance companies meant to ...
  4. Medicare Part D

    A prescription drug benefit program that was created through ...
  5. Dynamic Updating

    A method of determining how much to withdraw from retirement ...
  6. Possibility Of Failure (POF) Rates

    The likelihood that a retiree will run out of money prematurely ...
RELATED FAQS
  1. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  2. Are spousal Social Security benefits retroactive?

    Spousal Social Security benefits are retroactive. These benefits are quite complicated, and anyone in this type of situation ... Read Full Answer >>
  3. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy ... Read Full Answer >>
  4. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>
  5. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>
  6. What are Social Security spousal benefits?

    Social Security spousal benefits are partial retirement or disability benefits granted to the spouses of qualifying taxpayers.  Qualifying ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!