Sad truth is, traditional Medicare isn't going to cover all of your health-care needs. Here's what you can do about it.

If you don't have retiree health benefits from a former employer or union, this article is for you. (If you do, click here for more on this.) As we've mentioned in our previous article, Medicare doesn't offer complete medical coverage. So unless you're willing to make a sucker's bet that you'll never become ill, you'll need to purchase some kind of supplemental insurance. Otherwise, you'll potentially be on the hook for thousands of dollars in out-of-pocket expenses.

Fortunately, you've got plenty of choices for obtaining coverage for what Medicare doesn't cover. These options fall into two broad categories: There are the "Medigap" policies, which will provide additional coverage for some of what Medicare doesn't cover. Alternatively you can replace your traditional Medicare Part B coverage with a managed-care plan (such as a HMO) known as Medicare Advantage. By 2006, you'll have the option to buy a Medicare Advantage plan that will act more like a preferred provider plan with a drug benefit. (We'll provide a full description of your options below.) Deciding which option and specific plan is right for you, however, is no easy task. "The reality is that everyone's situation is very different and there's no one piece of advice for everyone," says Ron Pollack, executive director of consumer advocacy group Families USA.

Much of your decision will ride on what you can afford. That said, you obviously want to pick the plan that provides adequate coverage for your current needs — as well as potential needs further down the road. Don't be cheap: Trying to save money in the early years may not pay off, since the more comprehensive plans may not be available to you should your health deteriorate.

Also, while Medicare reform may eventually offer seniors more coverage, don't bank on it. Plus, you can always drop your supplemental coverage if you find you don't need it later on.

Before you can select a policy that will either supplement or replace the Original Medicare Plan, you'll need to understand your options as they stand today. Here's a brief description of the types of plans available to Medicare beneficiaries.

Medigap
A Medigap plan is appropriate for seniors who like the freedom of the Original Medicare Plan (which includes the luxury of choosing one's own doctors) but want to purchase additional insurance for what Medicare won't cover. The idea here is that by paying more each month one can limit his or her total out-of-pocket costs. Some 22% of Medicare beneficiaries choose to buy a Medigap policy to supplement the Original Medicare Plan, according to the Kaiser Family Foundation, a nonprofit that focuses on health care policy.

Although Medigap plans are administered by private companies, there are 10 standardized plans called "A" through "J." (You may find, however, that a specific plan isn't available in your area.) Plan A offers very basic benefits, while J provides the most coverage, including drug benefits up to $3,000 annually and preventive care such as annual check-ups. That said, even the best of plans won't cover long-term care, vision and dental care, private-duty nursing and unlimited prescription drugs. For a listing of benefits for each plan, see page 14 of the Centers for Medicare and Medicaid Services' booklet "Choosing a Medigap Policy."

If you can afford it, it's probably wise to purchase the best coverage possible. Unfortunately, it doesn't come cheap, although rates vary greatly by company and region of the country. While a Medigap J policy for a healthy 65-year-old woman could cost $2,460 a year (on top of the Medicare Part B premium) in Manchester, N.H., it could run as high as $5,244 in Chicago. Enrollees should also expect their premiums to rise with time. For this reason, many seniors simply can't afford the more comprehensive supplemental insurance policies on the market and should consider Medicare Advantage plans instead. (We'll talk more about these plans below.)

Medicare Select
Suffering from sticker shock? Here's a solution. In some states, you may be able to buy a cheaper Medicare Select plan. Like a Medigap plan, Medicare Select supplements the Original Medicare Plan. But you get what you pay for. In exchange for a lower premium, a beneficiary must give up some of his or her freedom. These plans typically limit the number of hospitals a beneficiary can go to, and in some cases your choice of doctor. The only exception to these rules would be during a medical emergency.

Medicare Advantage HMOs
An even more affordable option for seniors is to sign up for a Medicare Advantage plan. These plans are run by private insurance companies under contract with Medicare.

The majority of Medicare Advantage policies are managed-care plans. For the same $78.20 monthly premium one might pay for Medicare Part B, enrollees in Medicare Advantage receive more benefits, such as annual check-ups. And if a senior is willing to pay a little more each month, the coverage increases considerably. The drawback to these options is that seniors are then enrolled in an HMO or PPO plan that limits which doctor they can see and may require that they get a referral before seeing a specialist.

Potential enrollees should also be aware that rising health-care costs and market pressures have caused a decline in the availability of these plans and the breath of some key benefits in the remaining ones, such as prescription-drug coverage, preventive dental care and hearing benefits. Today, 38% of plans with drug benefits cover only generic medications and 19% of enrollees have an annual prescription-drug benefit cap of $1,000 or less, according to the Kaiser Family Foundation. Some of the cheaper and more restrictive plans are also not ideally suited for snowbirds, warns MIC Insurance Services' Irene Card. If you winter in a different state, you may find you can't see a doctor unless you're suffering a medical emergency. So make sure you read the fine print before you sign on the dotted line.

Medicare Advantage Private Fee-for-Service Plans
The newest Medicare Advantage option for seniors is the Private Fee-for-Service Plan, available in about half of the U.S. It offers enrollees far more choice than an HMO, since it allows seniors the freedom to see any doctor they like. They also tend to have much cheaper premiums than Medigap policies. In 2005 Humana, for example, charged its enrollees in the upper Midwest an additional zero to $79, and $95 to $179 for people living right outside of Chicago, for coverage that includes prescription drugs. In exchange for lower premiums, however, members are required to pay a small fee or copayment each time they seek medical services. Still, total out-of-pocket costs are generally much lower with a private fee-for-service plan than a Medigap policy, says Luisa Charbonneau, Humana's executive director for expansion markets. Since these plans are relatively new, there are no independent studies comparing actual out-of-pocket costs with those of Medigap plans.

Choosing a Plan
Now that you know your options, you're ready to choose a plan that's right for you. Your first step is to identify which ones are available in your area. Uncle Sam can help you out here. Click on the Medicare Personal Plan Finder for a complete list sorted by area code. Don't forget to shop around, since similar plans offered by different insurance companies can vary greatly by price.

Now you're ready for what the AARP's Medicare lobbyist Kristen Sloan calls the "Kitchen Table Test." Make a list of all the health-care services you used last year, then calculate what you would have spent based upon what's covered under each policy. Our applet Choosing the Best Health Plan can help you sort through all the numbers.

What you may have noticed is that some of the cheapest plans could offer limited benefits and could cost the enrollee more in out-of-pocket expenses than some of the plans with higher premiums. Indeed, the scope of coverage provided is often a more important determinant of total out-of-pocket costs than are premiums, says the Kaiser Family Foundation's Tricia Neuman.

And don't forget to think ahead. As depressing as it is to consider, even if you're healthy today, there's a good chance you won't be at some point in the future. "In some ways, people with chronic conditions have it easier," Neuman says. "They know what medications they need to take and can cost out the prescription-drug benefits available." So be sure to consider your family history and lifestyle when contemplating future needs.