Budgeting for healthcare costs in retirement is tough since there’s usually no way of knowing whether your expenses each year will be minimal or huge. While traditional Medicare provides good basic coverage, it pays only about 80% of the costs it approves for hospitals, doctors, and medical procedures. The other 20% of the bill is the individual’s responsibility and—unlike coverage under the Affordable Care Act—there is no cap on the amount a person might have to pay in one year.

Let's say, for example, that you need heart bypass surgery. The cost would be a minimum of $85,891, according to the American Heart Association, and you would be responsible for a co-pay of $17,178—or much more if there are complications or something else goes wrong. In addition, some health needs, such as prescription drugs, hearing aids, eyeglasses, and dental care, are not covered at all by regular Medicare.

Key Takeaways

  • Traditional Medicare provides good basic health coverage, but it pays only about 80% of approved costs for hospitals, doctors, and medical procedures and doesn't cover drug costs or such things as dental care.
  • Medigap supplemental policies or Medicare Advantage plans, which are either HMOs or PPOs, are designed to fill Medicare coverage gaps.
  • To avoid penalties and gaps in coverage, most people should sign up for Medicare Part A (hospitals) and Part B (doctors) within the seven-month window that starts three months before the month you turn 65 to three months following your 65th birthday.
  • A drug plan (Part D) must be purchased separately along with a Medigap plan or Medicare Advantage (unless drugs are covered in the Medicare Advantage plan).
  • Consider plan costs, plan doctors, convenience, your lifestyle and travel plans, your health, and any additional benefits in making your choice.

Two Ways to Fill the Coverage Gap

There are two basic ways for recipients to fill most of these coverage gaps and reduce the risk of tremendous bills in a bad health year. 

Medicare plus Medigap supplemental policies

About two-thirds of the 61 million seniors and disabled Medicare beneficiaries choose traditional Medicare, Parts A and B, which cover hospitals, doctors, and medical procedures. About 80% of these recipients supplement their insurance with Medigap (Medicare Supplemental), Medicaid, employer-sponsored and/or Part D prescription drug policies.

While this may be the more expensive option, it has a few advantages. Both Medicare and Medigap plans cover you for any hospital or doctor in the U.S. that accepts Medicare, and the great majority do. There is no need for prior authorization or a referral from a primary care doctor. Coverage includes the entire U.S., which may be important for those who travel frequently or spend part of the year in a different locale. This option is also attractive to those who have particular physicians and hospitals they want to use.

Medicare Advantage plans

Private Medicare Advantage policies (Part C) are marketed to consumers under such names as Aetna, Humana, and Kaiser Foundation Medicare plans. They may have no premium or a lower one compared to the significant premiums for Medigap and drug insurance policies. Medicare Advantage plans cover hospitals and doctors and often also include drug insurance and some services not covered by Medicare. A little more than one-third of Medicare recipients choose one of these plans.

The plans operate as a health maintenance organization (HMO) or a preferred provider organization (PPO) and limit members to using the doctors and hospitals in their networks. Some plans require prior authorization for specialist care or procedures, and/or a referral from a primary care doctor. Plans may not cover care given outside of the network’s geographical area. Extra benefits not covered by regular Medicare, such as eyeglasses, some dental care, or gym memberships, may be offered. 

Age 65: Your First Decision Point 

As you approach age 65, it’s important to know which enrollment deadlines apply to your circumstances to avoid costly fines and gaps in coverage. Begin by checking on your eligibility. To avoid penalties and gaps in coverage, most people should sign up for Medicare Part A (hospitals) and Part B (doctors) in the seven month window that starts three months before the month you turn 65 to three months following your 65th birthday. If you currently get Social Security, you will be automatically enrolled; if not, you need to sign up either online or at your Social Security office. 

If you are working at age 65, however, and you have employer insurance through a company with more than 20 employees, you have the right to stay on your employer insurance and delay signing up for Medicare Part B until your employer coverage ends. If you work for an employer with fewer than 20 employees, it is very important to ask the employer whether you are required to sign up for Medicare and get that decision in writing.

You need to be signed up for Medicare Parts A and B before you can enroll in a Medicare Advantage (Part C) plan. Once you’ve enrolled in Medicare, a key decision point is choosing coverage for Part D drug insurance. If you don’t enroll in Part D insurance when you start Medicare and want to buy drug coverage later on, you may be permanently penalized for signing up late. You can avoid the penalty, however, if you have what's known as creditable prescription drug coverage, which is prescription drug coverage (from an employer or union, for example) that’s expected to pay, on average, at least as much as Medicare’s standard prescription drug coverage. If you have this kind of drug coverage when you become eligible for Medicare, you are generally allowed to keep it and won't have to pay a penalty if you later decide to enroll in a Medicare prescription drug plan. 

Many Medicare Advantage plans include Part D drug insurance, but a stand-alone policy can also be purchased for those who choose regular Medicare or a Medicare Advantage plan that doesn’t include Part D.

Choosing Traditional Medicare Plus a Medigap Plan

Regular or traditional Medicare comprises Part A (hospital) and Part B (doctors and procedures) and is most often supplemented by private Part D drug insurance and Medigap supplemental policies. While signing up for Medicare gets you into Parts A and B, you have to take action on your own to buy these supplemental policies. 

Finding Part D, drug insurance

To get started, find the plans available in your zip code. Once you have created an account at Medicare.gov, you can enter the names of your drugs and use a convenient tool that allows you to compare plan premiums, deductibles, and Medicare star ratings.

If you don’t take many (or any) prescription drugs, look for a plan with a low monthly premium. All plans must still cover most drugs used by people with Medicare. If, on the other hand, you have high prescription drug costs, check into plans that cover your drugs in the notorious donut hole, the coverage gap period that kicks in after the plan has spent $4,020 on covered drugs in 2020.

Selecting a Medigap (supplemental) plan: Recent changes limit choices

Medigap policies are private plans, available from insurance companies or through brokers, but not on medicare.gov. They are labeled Plans A, B, C, D, F, G, K, L, M, and N.2, each with a different coverage set, standardized by Medicare. Some plans include emergency medical benefits during foreign travel. Since coverage is standard, there are no ratings of Medigap policies. Consumers can confidently compare insurer’s prices for each letter plan and simply choose the better deal.

Until recently, most people (66%) who bought Medigap policies chose Plan F, which gave the most comprehensive coverage, including paying for the Medicare Part B deductible ($198 in 2020). However, in an effort to trim Medicare expenses, Congress suspended Plans C and F for people who become Medicare-eligible in 2020 and beyond. Plan D and Plan G have similar benefits to Plan C and Plan F, except for not covering the Part B deductible. People who signed up or became eligible for Medicare before 2020 can purchase or continue Plans C or F, though prices may rise and it may be a better deal to switch to a plan that doesn’t cover the deductible.

Choosing a Medicare Advantage Plan

Medicare Advantage Health Plans are similar to private health insurance. Most services, such as office visits, lab work, surgery, and many others, are covered after a small co-pay. Plans offer an HMO or PPO network and place a yearly limit on total out-of-pocket expenses. Each plan has different benefits and rules. Most provide prescription drug coverage. Some require a referral to see a specialist while others won’t. Some may pay a portion of out-of-network care, while others will cover only doctors and facilities that are in the HMO or PPO network.

Selecting a plan with a low or no annual premium can be important. But its also essential to check on co-pay and coinsurance costs, especially for expensive hospital stays and procedures, to estimate your possible annual expenses. Since care is often limited to in-network physicians and hospitals, the quality and size of a particular plan’s network should be an important factor in your choice. 

Head to the Find a Medicare plan page at medicare.gov where the compare feature allows you to look at plans side by side. The National Committee for Quality Assurance (NCQA), an insurance rating organization, also compares what consumers think of Advantage plan’s services and physicians, and whether the plans meet certain quality standards. Top ratings in 2019 were garnered by an impressive 43 Aetna Medicare Advantage plans sold in 37 states plus the District of Columbia. Other companies with highly-rated Medicare Advantage plans included: Blue Cross/Blue Shield, Humana, Kaiser Foundation Health Plans, and United Healthcare. Be sure to check the ratings for plans available in your state.

What to Consider in Making Your Choice

Your lifestyle, health condition, and finances may all influence whether traditional Medicare plus Medigap or Medicare Advantage is best for you. Here are some things to consider:

The costs 

Medicare Advantage plans are reputed to save you money, but be sure to check whether drug benefits are included. If not, you’ll need to buy a separate Part D plan. Also check the cost of any premiums, co-pays, and other out-of-pocket expenses, and whether there are any limits in their coverage. If extra benefits are included, such as help with hearing aids and dental bills, be sure to find out how much of these expenses will actually be covered. 

Compare these costs to those of purchasing Medigap and Part D drug policies. Calculate the premiums, as well as the amount of any out-of-pocket expenses (deductibles, co-pays, coinsurance) the policies may require. Yes, these can be complex calculations, but an insurance broker can help by doing the math for you and making cost-saving recommendations.

Choice of doctors 

Traditional Medicare allows you to use any U.S. doctor or hospital that accepts Medicare, and most do. Medicare Advantage plans almost always restrict you to using physicians in their network and may cover less, or none, of the expenses of using out-of-network and out-of-town providers.

A plus of Advantage managed care plans is that care is coordinated and your primary care doctor will be in the loop about the findings of specialists. With traditional Medicare you don’t need a referral to see a specialist or a prior authorization for procedures, but you’ll need to make sure care is coordinated and your doctors are in communication with one another. Often this is best done by developing a relationship with a primary care physician and letting them refer you to specialists. 

Local conditions and convenience

In some areas where physicians and hospitals are scarce, it’s important to check out both the networks of available Medicare Advantage plans and the locations of providers who accept regular Medicare. Are the doctors accepting new patients? Will you have to travel far to see a provider or be treated at an emergency room? Advice from local professionals, neighbors, and insurance brokers can help you choose the most convenient option.

Lifestyle factors 

Frequent travel, dual residences, and currently having physicians whom you would like to keep are some of the factors that may make regular Medicare a good choice. Ask your current physicians if they participate in any Medicare Advantage plans and/or accept regular Medicare. For frequent fliers, choosing regular Medicare plus a Medigap policy that covers emergency care in foreign countries is a good bet. Similarly, people who spend part of the year in a different geographical area may find it difficult to stay in network for medical care and will probably be better off with regular Medicare and a Medigap policy.

Your health 

People with chronic diseases and those who develop a serious health condition should look deeper into the choices available. A Medicare Advantage plan may be a better choice if it has an out-of-pocket maximum that protects you from huge bills. Regular Medicare plus a Medigap plan will allow you more choice in where you receive your care. Check whether any expensive drugs or equipment (such as supplies for people with diabetes) will be covered by your drug plan, whether it's a stand-alone one or part of a Medicare Advantage plan. 

Broader benefits 

Medicare Advantage plans are in the throes of change as the government allows insurers to add coverage for items that are not included in regular Medicare. These include such things as supplying food for service animals; paying for ramps for wheelchairs, hold bars, and indoor air quality monitors; adult day care; and residential and in-home respite care. Many of these benefits are just being initiated, so it pays to reconsider your choice of regular Medicare vs. Medicare Advantage each year during open enrollment to make sure you’re getting the benefits you need most, whether it's home care or transportation to doctors.

Can You Switch? Yes, But There’s a Catch

It’s logical to consider enjoying the cost savings of a Medicare Advantage plan while you’re relatively healthy, and then switching back to regular Medicare if you develop a condition you want treated at an out-of-town facility. In fact, switching between the two forms of Medicare (or between Medicare Advantage plans) is an option for everyone during the open enrollment period in the fall.

Here’s the catch. If you switch back to regular Medicare, you may not be able to sign up for a Medigap policy. When you first sign up for Medicare, Medigap insurance companies are obligated to sell you a policy, regardless of your medical condition. But in subsequent years they may have the right to charge you extra due to your age and preexisting conditions, or not to sell you a policy at all if you have serious medical problems. Some states have enacted laws to address this. In New York and Connecticut, for example, Medigap plans are guaranteed-issue year-round, while California, Massachusetts, Maine, Missouri, and Oregon have all set aside annual periods in which switching is allowed. If you live in a state that doesn't have this protection, planning to switch between the systems depending on your health condition is a risky business.