Should I Buy Supplemental Health Insurance?

They Can Be a Great Addition to Health Insurance, But You May Not Need One

Supplemental Insurance Be on the lookout for the duck!.

Supplemental insurance is extra or additional insurance that you can purchase to help you pay for services and out-of-pocket expenses that your regular insurance does not cover.

Some supplemental insurance plans will pay for out-of-pocket medical expenses, such as deductibles, copayments, and coinsurance. Other supplemental plans may provide you with a cash benefit paid out over a period of time or given to you in one lump sum.

The cash can be used to cover lost wages, transportation related to your health condition, or used to pay for food, medication, and other unexpected expenses you have due to an illness or injury.

A Dr. Mike Tip: Supplemental insurance is just that – a supplement, or add-on. It is not a replacement for regular health insurance!

Medigap – Medicare Supplemental Insurance

One of the most common types of supplemental insurance is Medigap, which can be sold by private insurance companies to people enrolled in Original Medicare (Medigap plans cannot be paired with Medicare Advantage plans).

Original Medicare (which includes Part A Hospital Insurance and Part B Medical Insurance) pays for many, but not all, health-related services and medical supplies. You can purchase a supplemental insurance policy to cover some or all of the out-of-pocket costs you'd otherwise incur under Original Medicare—ie, the “gaps," which include copayments, coinsurance, and deductibles.

These can add up to a lot of out-of-pocket expenses, especially if you are hospitalized or need skilled nursing home services.

And it's worth noting that there is no upper limit on how high your out-of-pocket costs can be under Original Medicare without a Medigap plan (as opposed to Medicare Advantage plans and private insurance for people under 65, which has caps on out-of-pocket exposure).

In general, Medigap plans only pick up the out-of-pocket costs for services that are otherwise coverage by Medicare (ie, they don't pay for things that Medicare doesn't cover at all), but some Medigap policies also will pay for certain health services outside the United States, which isn't otherwise covered by Medicare. If you are in Original Medicare (Parts A and B) and you have a Medigap policy, first Medicare pays its share of the Medicare-approved amounts for your covered health care costs. Then your Medigap policy pays its share of the cost.

There are currently Medigap plans available that will cover all of the out-of-pocket costs for covered Medicare services, but those plans will no longer be for sale as of 2020, due to the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA).

Most Common Types of Supplemental Insurance

Aside from Medigap policies, three other types of supplemental health insurance are widely sold in the U.S. These supplemental policies may be available as a voluntary benefit from your employer or you can purchase one directly from an insurance company.

Critical Illness Insurance
Critical illness insurance (also known as disease-specific insurance) is meant to ease the financial burden of a serious illness, such as cancer.

These policies may provide a lump-sum cash benefit to help you pay for additional costs that are related to your illness but not covered by your regular health plan or disability coverage. Depending on the specific policy, the coverage can be used to pay for:

  • deductibles
  • out-of-network specialists
  • travel and lodging when treatment is far from home
  • experimental treatment, usually related to cancer therapy
  • child care and household help
  • normal living expenses, such as your car payment, utility bills, and groceries

Accidental Death Policies
There are two kinds of accident policies, including Accidental Death and Dismemberment Insurance (AD&D) and Accident Health Insurance.

They are often combined and sold together. The benefits vary from state to state due to local insurance regulations.

An accidental death and dismemberment policy will pay you a lump-sum cash benefit if you are the named beneficiary of someone who died in an accident. These policies may also pay smaller amounts if the person did not die in an accident but lost a limb, eyesight, or suffered permanent paralysis. AD&D insurance does not pay for any deaths related to illness, suicide, or natural causes.

Accident health insurance (also known as an accident hospital indemnity policy) may pay for medical costs resulting from an accident that are not covered by your regular health insurance. Some of these policies may also pay for extended homecare services, and travel and lodging expenses for family members.

Accident supplement policies are popular with healthy people who purchase high-deductible health insurance plans; accidents can happen to the healthiest people, and the supplement can help to cover all or part of the deductible and other out-of-pocket costs under the health insurance plan.

Hospital Indemnity Insurance
Hospital Indemnity Insurance (also known as Hospital Confinement Insurance) provides a cash benefit if you are “confined” to a hospital due to an illness or serious injury. The cash benefit – doled out in one lump sum or as daily or weekly payments – may not start until after a minimum waiting period. Similar to other types of supplemental insurance, the additional coverage is meant to help you pay for services and needed items not covered by your regular health plan.

Buyer Beware – You May Not Need the Extra Coverage

Supplemental health insurance plans are heavily promoted in direct-to-consumer advertising. Many Americans are familiar with the Aflac duck, an advertising symbol that has helped Aflac become the largest provider of supplemental insurance in the U.S.

Although many supplemental policies are not overly expensive, duplicate coverage may be unnecessary. If you are over 65 and have Medicare, you can get the full health coverage you need by purchasing a standard Medigap policy or enrolling in a Medicare Advantage plan.

Your first step is to make sure that you and your family are protected with a regular health plan. If you think you need supplemental insurance, you should ask yourself the following questions:

  • If I or a family member gets into an accident or develops a serious illness, will my current health plan cover the costs of treatment?
  • Do I have a way to cover the out-of-pocket costs that would be incurred under my current health plan, along with the additional expenses that could go along with being sick and/or being out of work for an extended period of time?
  • How likely is it that I or a member of my family will be in a serious accident or develop a major illness?
  • Does the extra cost of the supplemental insurance policy make sense over time? 

Additionally, before purchasing a supplemental policy, it is important to understand the limitations and benefits of such insurance. For example, your supplemental policy may not cover all the expenses you expected; it may impose waiting periods before payments start; or, contain limits based on how much you paid and for how long.

Be aware that supplemental insurance is not regulated by the ACA. That means supplemental plans can base eligibility on medical history, impose limits on pre-existing conditions, and—by the very nature of these plans—cap benefits at fairly low levels. It's common to see supplemental plans with benefit limits that range from a few thousand dollars to a few hundred thousand dollars. These plans may be a great supplement to the health insurance coverage you have, but they are never intended to stand along as your only coverage. They are not minimum essential coverage, so people who rely on them without other coverage will be subject to the ACA's individual mandate penalty for being uninsured.

Before signing on the dotted line, make sure you fully understand the benefits and limitations of the insurance. And, beware of duck poop!

A Dr Mike Suggested Resource
The National Association of Insurance Commissioners has an excellent online brochure: A Shopper’s Guide to Cancer Insurance.

Sources:

Congress.gov. H.R.2, Medicare Access and CHIP Reauthorization Act of 2015.

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