Medicare can cover most of your health care needs when you turn 65, but it doesn’t pay for everything. And one of the most significant financial challenges to watch out for are the out-of-pocket costs you can face aside from monthly premiums — including deductibles and other types of cost sharing.
Just how much you’ll pay, and when, depends on the type of Medicare enrollment that you choose: traditional Medicare, which is operated by the government and provides care on a fee-for-service basis, or Medicare Advantage, which is run by private insurance companies and operates on a managed care model.
There is no built-in annual out-of-pocket limit in traditional Medicare for outpatient and hospitalization services. Protection is available from supplemental insurance coverage. Some retirees get this from former employers or unions, but most often it means purchasing Medigap — a policy offered by private insurance companies that covers part or all of Medicare’s cost-sharing requirements. And 10 percent of people on traditional Medicare age 65 or older don’t have any supplemental protection, according to KFF, a nonprofit health policy research group — which is a risky move, experts say.
Medicare Advantage plans come with out-of-pocket limits — but they can be high, ranging from roughly $5,000 to $9,000 annually depending on the services you use. What’s more, the out-of-pocket protection varies among plans. When serious medical conditions arise, out-of-pocket costs can be a significant financial hit or make it difficult to afford care altogether. (Starting this year, the Inflation Reduction Act of 2022 imposes a $2,000 cap on total out-of-pocket spending for drugs covered by Part D plans.)
Choosing between traditional Medicare and Advantage shouldn’t be based on cost alone. Medicare Advantage plans offer one-stop shopping and extra benefits, but they restrict care to in-network providers and have been criticized for techniques such as “prior authorization,” used by insurance companies to ensure that services are medically necessary by requiring approval before a benefit will be covered. Traditional Medicare offers the widest access to health providers, and only a small group of medical services require prior authorization.
It’s important to understand the out-of-pocket trade-offs between traditional Medicare and Medicare Advantage. Let’s look at how Medigap policies work and how to buy them — and how to evaluate what you might pay out-of-pocket in Advantage plans.
What does Medigap cover?
Buying Medigap can be daunting, since the policies come in an alphabet soup of lettered plan choices (A, B, C, D, F, G, K, L, M and N). And those first two Medigap plans should not be confused with two basic building blocks of Medicare that everyone uses — Part A (hospitalization) and Part B (outpatient services).
Medigap premium prices will differ, but the benefits offered by plans are standardized across insurers and across the country, which makes it easier to compare plans based on the premium alone.
All Medigap policies cover hospital coinsurance — the costs that you pay for longer stays after deductibles are met. Many cover all or part of the hospital deductible ($1,676 this year). Medigap plans also cover all or part of the 20 percent of fees for most physician services after you meet the Part B deductible ($257 this year). Some cover the cost-sharing in skilled nursing facilities.
They are required to also cover some or all of the cost sharing for outpatient services, and the more robust plans cover the annual hospital deductible and cost-sharing in skilled nursing facilities.
Like Medicare Advantage plans, some Medigap policies provide some amount of coverage for vision, dental and hearing benefits, and gym memberships. Their premiums often are slightly higher than their standard versions.
The most robust plan types — lettered F, G and N — are the most popular, according to KFF, but F plans cannot be sold to new beneficiaries who turned 65 after Jan. 1, 2020, because of a change in federal law. The Medicare Rights Center offers a useful chart that details what is covered by the various Medigap plan types.
When should you buy a Medigap policy?
The best time to buy a Medigap plan is when you first sign up for Part B, which covers doctor visits and outpatient care. That’s when Medicare forbids Medigap plans from rejecting you, or charging a higher premium, if you have a pre-existing condition. This is referred to as “guaranteed issue,” and the opportunity is available to you during your six-month Medigap Open Enrollment Period, which starts on the first day of the month in which you’re 65 or older and enrolled in Medicare Part B.
After this period ends, Medigap plans in most states can reject applications or charge higher premiums because of pre-existing conditions, with the exception of four states that protect Medigap applicants beyond the guaranteed issue period (Connecticut, Maine, Massachusetts and New York).
“I’m going to get the lowest-priced plan for my age at that time,” says Bethany Cissell, director of business development for health care insurance services at Allsup, a company that provides help selecting a plan for a fee.
In Medicare Advantage, but want to switch?
The annual Medicare Advantage Enrollment period opened Jan. 1 and will run through March 31 — this is the time when people enrolled in Advantage can switch plans or move to traditional Medicare.
If you’re switching Advantage plans, be sure to check on any new plan’s out-of-pocket costs. And before making a decision to move to traditional Medicare, make sure you can obtain a Medigap policy, and at what cost. If you’re facing high health care costs this year, a Medigap plan purchased outside of your guaranteed issue window could be competitive or even less than the out-of-pocket costs in Medicare Advantage.
How do I find a plan?
You can shop the online federal Medicare plan finder for Medigap policies in your area by plan type; once you’ve identified a plan that interests you, contact the insurance company for details. State Health Insurance Assistance Programs can help with plan selections, and they post online lists of plan offerings; for example, here is the list for New York State.
What will Medigap cost?
The premium will vary, depending on the plan type that you select. But the average monthly price for a Medigap policy in 2023 was $217, according to KFF.
In most states, the initial premium is based on your current age, but it will rise as you get older. In nine states, insurers are required to charge the same rate to policyholders regardless of age (Connecticut, Massachusetts and New York all require this “community rating”).
One option for bringing down the cost of premiums — available in many states — is a high-deductible plan. The high-deductible option makes sense for people who can handle the variable cost in years when their health care utilization is high.
Medigap F and G plans can be sold with a high-deductible option, although G is the only choice for new enrollees these days. For example, Plan G offerings in New York City this year average around $400 per month, while high-deductible G plans are an average of about $70 per month. The deductible for these plans in 2025 is $2,870.
It’s not a well-publicized option, however, because of the commission structure used by insurance agents and brokerage organizations, according to research by the Commonwealth Fund. “Since Medigap commissions generally are a percentage of the premium, it incentivizes brokers to sell the G plans with the higher premiums,” says Gretchen Jacobson, vice president for Medicare at the foundation, which focuses on health care policy.
Do I need to revisit my Medigap enrollment every year?
No — unlike Part D prescription drug and Advantage plans, which should be reshopped periodically, there’s no reason to review your Medigap coverage once you have a policy. You can keep your policy even if you move to a different state, so long as you remain in traditional Medicare.
“Assuming you can afford the monthly premium, it’s not health insurance that needs to be reviewed every year,” says Frederic Riccardi, president of the Medicare Rights Center, an advocacy and consumer organization. “You pay your premium, you have access to a standardized set of benefits that don’t change from year to year. You can just set it and go.”
What’s more expensive: Traditional or Advantage?
Traditional Medicare comes with the higher upfront cost of premiums for a Medigap policy (if you buy one) and a stand-alone Part D prescription drug plan in most cases. Many Advantage plans include prescription drug coverage with no additional premium, and Medigap is not needed because Advantage plans come with out-of-pocket limits — indeed, they are not allowed.
With Advantage, the exposure can be high in years when you need lots of health care. The average cap in 2024 was $4,882 for in-network services and $8,707 for both in-network and out-of-network services, according to KFF. Cost-sharing features differ from those found in traditional Medicare. And, unlike Medigap plans, which provide standard out-of-pocket protection across all insurance providers, the out-of-pocket features in the Advantage program vary by plan.
“It’s not necessarily true that Medicare Advantage will save you money,” said Tricia Neuman, senior vice president of KFF. “There are out-of-pocket costs for people in Medicare Advantage, just as there are for people in traditional Medicare.”
In the Medicare Plan Finder, Advantage plans are required to disclose maximum in-network out-of-pocket limits, and Advantage P.P.O.s (for preferred provider organizations) must also disclose the maximum out-of-network exposure. “The information is published, but it’s very difficult to compare,” Dr. Neuman said. “It’s really on the consumer to try to sort through which plan provides the most or least protection, and that’s tough to do.”
Which approach has the greater out-of-pocket exposure — traditional Medicare or Advantage? A traditional Medicare enrollee in New York City might pay $4,800 this year for a standard Medigap G plan, which will cover all cost sharing except the $257 Part B deductible. The high-deductible G option pencils out about the same — in a year when your health care use is high, this option might cost a total of $4,200 (premium and deductible) — considerably less than the out-of-pocket exposure in most Advantage P.P.O. plans.
By contrast, Medicare Advantage P.P.O. out-of-pocket maximums in the city for combined in- and out-of-network services range from $9,000 to $14,000. Enrollees in these plans will encounter these higher costs if they get at least some of their care out of network.
That’s not to say everyone will face that level of spending. Just 5 percent of traditional Medicare beneficiaries in 2020 had out-of-pocket costs of $6,700 or more in deductibles, copays and coinsurance in Part A and Part B, and 15 percent had costs over $3,400.
“When people talk about out-of-pocket limits, it’s important to bear in mind that they are set deliberately so that a relatively small share of people are expected to exceed those figures,” said Ms. Jacobson, of the Commonwealth Fund.
But if you have a major health problem and fall into that high-spending tier, the cost can be catastrophic.
And more generally, people enrolled in traditional Medicare with supplemental coverage are the least likely to report problems managing their costs, because they have the greatest level of protection, KFF research shows.
