The ABCs of Picking a Medigap Policy

Editor's note: This article is adapted from Kiplinger's Retirement Planning 2008 guide. Order your copy today.

If you decide to stick with traditional Medicare, you have numerous choices to fill the gaps in coverage. Medigap policies come in nine standardized versions. The price and coverage generally increase as you move through the alphabet from the basic Plan A through the more comprehensive Plan G. (Plans H, I and J, which include prescription-drug coverage, are no longer sold.) Plans K and L are high-deductible plans with lower premiums but more out-of-pocket costs.

The most popular choice is Plan F, which tends to have the best balance of coverage and price. In 2008, it covers Medicare's $256 daily co-payment for days 61 to 90 in a hospital. (Basic Medicare covers the first 60 days of a hospital stay.) Plan F also covers the $512 daily co-payment for days 91 to 150, and payment in full for 365 additional hospital days during your lifetime. It also covers the 20% co-payment for doctors' services and the cost of three pints of blood, as well as the $1,024 hospital deductible, the $128-a-day co-insurance for a skilled-nursing facility, the $135 Part B deductible, Part B excess charges, and emergency care outside the U.S.

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Because each plan with the same letter has exactly the same coverage, you can actually shop based on price. Most state insurance department Web sites list prices for medigap policies in your area (find links to your state insurance department on our insurance page). You can also use the Medicare Options Compare tool at Medicare.gov/mppf.

Then check the pricing method. Attained-age policies increase in price as you get older. Issue-age policies only increase prices because of health-care inflation, not because of your age. An issue-age policy may start out a little more expensive, but it will have fewer rate increases over time. Community-rated policies are similar to issue-age policies, but everyone in the area pays the same price regardless of age.

Pick the lowest-cost issue-age or community-rated policy. You may also want to buy a separate Medicare prescription-drug plan.