Should A Retiree Purchase Medicare Supplemental Insurance?

The following is a conversation that I recently had with a friend who is retiring soon. He wanted to know if he should purchase a supplemental insurance policy when he signs up for Medicare. This is a highly personal decision, so rather than give him advice, I tried to explain, in very basic terms, what health care coverage will cost and which services are covered by Medicare and supplemental policies.  My hope is that people who learn about retirement health care will ultimately make smart decisions that will lead to long-term financial security.

A friend of mine named Larry, who is planning to retire this year, asked me if it made sense to purchase a Medicare supplemental policy. Larry is healthy and strong as a bull, so he wondered whether a MedSup policy was necessary.

For those of you who are still covered by your employer’s group plan, here is a primer on what you have to look forward to in retirement.

Medicare is a government-run program broken down into four basic parts. Why four parts? Apparently lawmakers simply have a need to make things complicated. To add fuel to the fire, the rules governing the program can change fairly often.

Medicare Part A covers hospitalization, and for most Americans, it’s free – as long as the recipient paid Medicare taxes while employed. If not, the 2015 monthly premium is $407.

Part B covers doctor visits and tests, and the current monthly premiums are $104.90 for most retirees. Here’s a little twist to premium payments I’m sure Update readers will not appreciate. Depending on your retirement income, those premiums can increase up to 220%. HealthView projects a 65-year-old couple retiring today will have to pay between $173,952 and $556,647 in lifetime Part B retirement premium costs.

Part D covers prescription drugs, but unlike Part B, it is offered through private insurance carriers that are on an approved vendor list in each state.  Unfortunately, these providers may offer a wide range of policies that can confuse and frustrate retirees.

And before you ask – yes. Part D premiums are also based on income, and lifetime costs for a 65-year-old can range from $76,217 to $218,743.

Now, back to Larry’s question: should he purchase supplemental insurance?

Let’s define the product first.

Supplemental insurance is primarily designed to cover Medicare deductibles and copays that would otherwise have to be paid out-of-pocket.  And yes, like Part D, MedSup is also offered by private companies in each individual state. In Massachusetts, the lifetime cost of MedSup premiums is projected to be $226,000. The national average is around $200,000.

Similar to employer-sponsored plans, Medicare recipients must pay initial deductibles and co-pays.  For a hospital visit, the current deductible for each 60-day benefit period is $1,260, and under Part B, Medicare subscribers will incur a $147 annual deductible, along with a 20% co-pay for most services. Subscribers are also responsible for excess charges up to a 15% maximum. 

Unfortunately, since there are no caps on health care costs in retirement, those who elect not to purchase supplemental insurance and experience a catastrophic health-related event could potentially place their retirement assets at risk. A retiree who is hospitalized multiple times and/or has ongoing physician appointments in any given year, but does not carry some form of supplemental insurance, may amass thousands of dollars in additional expenses related to deductibles and co-pays.

“Ron, you are avoiding the question with this boring oral dissertation on the Medicare system,” Larry says.

“I actually can’t answer the question for you, but I can help you answer the question for yourself. If you remain healthy in retirement, your total health care expenses will not change dramatically whether you have supplemental insurance or not. As a matter of fact, total costs may actually increase by owning a MedSup policy.”

“It’s about time you answered me,” Larry mutters.

“Did I? Here’s the flip side. Should you require significant medical attention at some point, supplemental insurance will ensure that you don’t deplete your lifetime savings.  So if you really want to know the answer, maybe you should call Clint Eastwood.  He’ll say, ‘You’ve gotta ask yourself one question: Do I feel lucky?’ Well, do you, Larry?”

“How many retirees buy a MedSup policy?” Larry ignores me.

“The majority of retirees purchase some form of supplemental insurance.”

“What do you mean: some form?”

“Supplemental insurance has an alphabet of its own! You see, our government has established 10 plan types (A through N) that insurance carriers are permitted to offer to retirees.  If you decide to purchase Plan F, each carrier must offer you the exact same benefits with one important difference: the price you are charged for the plan.”

“You mean the letters A, B, and D can refer to Medicare coverage and Med Sup plans, too?  And the same plan can be priced differently by insurance carrier?

“Yes and yes.”

“This is unbelievable. The same letters of the alphabet and different prices for the same plan?” Larry asks incredulously.

“Yea, it’s called lack of creativity,” I respond dryly.

“So they came up with Medicare Parts A, B and D. What happened to the letter C?”

“They actually have Parts A, B, C, and D.”

“And why didn’t you mention C?”  A fair question, I think.

“It’s a HMO form of supplemental insurance that consists of a range of benefit plans called the Medicare Advantage program.  I didn’t want to confuse you.”

“You mean more than you already have?  This is a nightmare! My wife and I will be buying Medicare Parts B, and then we will need to analyze an unlimited number of prescription drug plans, this Medicare Advantage program, and MedSup plans A through N every year, even at age 90?”

“It does make sense to review your options annually but you could, right or wrong, just renew the previous year’s plan selections.”

“So, are you going to purchase a MedSup plan?”

“I think I’ll just take start hang gliding and let nature take its course.”

Hey, it’s not all that bad. Medicare provides retirees with a smorgasbord of choices and hopefully, since we’re living longer, we will have the time and energy to evaluate all of the available retirement health care options…every single year…for the rest of our lives.

You can view a comparison table of MedSup plans at If you do visit this site, be aware that all of the policy types may not be available in your state of residence.