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The long-standing debate: Are high-deductible or low-deductible Medicare supplemental plans better?
If you came to this article looking for a definitive answer, you won’t find one. The concept of which is “better” depends on the individual. You could argue that high-deductible plans are better because the monthly premium is lower, so your fixed expenses are lower and you only pay for the care you use.
But that has some caveats. If you sign up for a high-deductible plan but use the healthcare system often, you end up paying for a large portion of your care out-of-pocket. Conversely, if you use a low-deductible plan but rarely use healthcare services, you’re wasting money on high monthly premiums. That’s why the question, “Which is better?” is so difficult to answer; it depends on the individual and their needs.
The question is difficult to answer, but not impossible. Let’s ignore the concept of healthcare utilization and simply look at dollars. Let’s look at the average annual premium for Medicare Plan G and the annual deductible for Part B, and the average annual premium and deductible for high-deductible plan G*.
Average Annual Premium Cost for Plan G: $1,643.88
2022’s deductible for Part B: $233
Total Annual Out-of-Pocket Cost: $1,876.88
Average Annual Premium Cost for HDPG: $480-$1,080
2022’s deductible for HDPG: $2,490
Total Annual Out-of-Pocket Cost: $2,970-3,570
*When you enroll in a high-deductible plan, you will be responsible for Medicare Part B’s deductible ($233 in 2022) before Medicare starts covering 80% of all costs. You will then be responsible for the other 20% of costs until you meet the Medigap plan’s deductible ($2,490 in 2022), after which all costs are covered. While a high-deductible plan does not cover the Part B deductible of $233, the plan will count the Part B deductible towards meeting the plan’s deductible of $2,490.
Although the premium is much cheaper for high-deductible plan G (HDPG), because of the higher deductible, HDHG is technically more expensive than the standard Plan G. When you also consider that the average annual amount Medicare enrollees spent on medical services in 2016 was $3,166, regardless of plan option, it makes more sense to select a lower deductible health plan (if we’re only looking at the total cost.)
Before we go on to another scenario, it’s important to reiterate that the health plan someone chooses should also be based on their healthcare needs, not just dollar amounts. It might seem appealing to pay a fixed cost of $40 a month rather than $136.99, but if someone frequently uses healthcare services, they’re going to spend more out-of-pocket because it will take longer for them to reach their deductible.
A scenario where choosing a high-deductible health plan is more cost efficient would be if someone is very healthy. They see their doctor once a year and maybe take a few over-the-counter medications. Let’s say they expect to spend about $800 out-of-pocket for all their medical services in a year. Adding that to their premium, let’s say they have the lowest annual premium amount of $480 for HDPG, means they would spend $1,280 total on healthcare costs in a year. Whereas if they had Plan G in the same scenario, they would spend $2,210.88.
If someone with the lowest annual premium option for HDPG spends $1,396.88 out-of-pocket for healthcare services in a year, that amount plus their annual premium of $480 would be $1,876.88 – the same amount as the total annual cost for someone with Medicare Plan G and a Part B deductible. If someone has the lowest premium amount for HDPG ($480), their “breakeven point” for out-of-pocket costs (excluding their premium) for whether the high-deductible plan is cheaper overall than Medicare Plan G is $1,396.88. For the highest premium amount for HDPG, it would be $796.88.
If Medicare-eligible Americans want to ensure they purchase the most cost-efficient plan, it’s imperative that they assess their healthcare needs and costs. A comprehensive financial planner can help them do so. An individual could also look on their own to see what they spent the previous year in healthcare costs to give them an idea of what they might spend next year. They’ll want to also consider any new, foreseeable healthcare expenses. For example, maybe they plan to receive joint replacement surgery next year. In that scenario, it would be wise to select a plan that will pay for the majority if not all the procedure.
What about switching back and forth between a high and low-deductible health plan? From the consumer standpoint, that would be great! You could adjust your plan based on your health needs. But insurance companies are smarter than that, and they do make it hard to switch between the two options.
When it comes to Medicare, you can surprisingly change your supplement (“Medigap”) plan at any time – but it’s not that easy. Once you’ve picked your plan and have been enrolled for a few months, you will need to go through medical underwriting unless you’re granted a special enrollment period due to a life event (e.g., relocation) or you have guaranteed issue rights (e.g., if you live in California and have the birthday rule). During the medical underwriting process, the insurance carrier will ask for a history of your medical needs and either approve or deny your application.
Whatever the circumstance, picking the most cost-efficient plan all depends on specific health needs and budgets. Analyze those before selecting a plan option, because this decision is often set in stone.
Christine Simone is a co-founder of Caribou, a healthcare cost prediction and optimization solution for financial advisors. She often writes on the topics of healthcare and women in tech.
Caribou’s industry experience working with retirees.
Read more articles by Christine Simone