Original Medicare, or Medicare Advantage? This is the most basic decision your clients must make about health insurance at the point of retirement, and it’s an important one.
Original Medicare still covers the majority of enrollees—about two-thirds this year, according to the Kaiser Family Foundation. But Advantage plan enrollment has grown quickly in recent years, partly due to some of their convenience features and additional benefits.
There also is a perception that these plans save people money. But are these perceptions accurate? A close look at the total cost of both programs shows that original Medicare remains the gold standard from the standpoint of flexible access to providers and predictability of total annual costs.
The basics
Medicare enrollees have two basic coverage choices. When you sign up for original Medicare, you’re enrolling in Part A (hospitalization) and Part B (outpatient services). Most people also add a Part D prescription drug plan.
Original Medicare offers fee-for-service coverage and is accepted by most health care providers. In most cases, drug plan premiums are not too onerous, averaging $33 per month this year, according to Kaiser. But the out-of-pocket costs can be significant. For example, there is no annual limit on what you pay out of pocket; Part A (hospitalization) has a deductible this year of $1,364 for each episode of illness, plus fixed daily costs for extended stays. Part B (outpatient care) covers 80% after you meet the annual deductible ($185 this year).
That is why most people add a supplemental plan to cap out-of-pocket expenses. Sometimes this comes as a benefit from former employers, but the other route is a commercially offered Medigap supplemental policy.
Medicare Advantage is the managed-care alternative to original Medicare. It offers the convenience of all-in-one coverage. You continue to pay your Part B premium, and usually there is no need to sign up separately for drug coverage. Medigap policies are not available in this situation, because Advantage plans come with their own caps on total annual out-of-pocket expenses.
However, the out-of-pocket caps are not insignificant. This year, the average among all plans for enrollees in HMO or PPO plans is $5,059 for in-network services, according to Kaiser; the average limit rises to $8,818 when Advantage PPO enrollees use out-of-network services.
The other significant trade-off with Advantage policies is that you must use the plan’s in-network providers to avoid additional charges with out-of-network providers.
Advantage plans often come with extra benefits, including some level of coverage for dental, vision and hearing care. Some plans also are beginning to experiment with a new class of nonmedical services under the Chronic Care Act, approved by Congress last year. This law set the stage for Advantage plans to begin paying for services such as grocery deliveries, caregiver support and retrofitting homes to support older adults with chronic conditions. They also are permitted to expand transportation services, which had been limited to visits to health care providers.
Advantage plans are not required to offer the new services, and they will be available on a very limited basis during 2020.
Sizing up client choices
The original-versus-Advantage choice arises when your clients first sign up for Medicare. That’s because of Medicare’s guaranteed issue rules, which forbid Medigap plans from rejecting an enrollee or charging higher premiums due to any preexisting condition. The guaranteed issue protection is available when your client first signs up for Part B. After that, Medigap plans in most states are permitted to reject applications or charge higher premiums, with the exception of four states that protect Medigap applicants beyond the open enrollment period: Connecticut, Maine, Massachusetts and New York. These states have continuous guaranteed issue rules.
Enrollees also can shift back and forth between original Medicare and Advantage during the annual fall enrollment period, which is underway now. Enrollment runs from October 15 to December 7. There’s also a special Medicare Advantage Open Enrollment Period from January 1 through March 31 each year, during which anyone enrolled in a Medicare Advantage Plan can switch between plans or switch to original Medicare, with or without a Part D plan.
Advantage plans tend to appeal to younger, healthier Medicare enrollees. In many cases, they are comfortable with managed care from their workplace health insurance experiences, and some decide to take a flier on the possibility that out-of-pocket expenses could jump.
“It really comes down to what you are looking for,” says Tricia Blazier, director of health care insurance services at Allsup, a firm that provides fee-based assistance on plan selection to Medicare enrollees. “How do you like to pay for things? With a Medigap policy, your premiums may be higher, but your out-of-pocket costs can be much lower, or nothing at all. Some people are comfortable with premiums, others prefer out-of-pocket spending.”
She adds that it’s important to consider how many doctors you see, and whether they accept Medicare and participate in your Advantage plan. Moreover, snowbirds who use Advantage need to consider access to care when they are not in their primary home location. Some plan providers make arrangements for flexible access to care by location, but it’s important to consider this up front.
The Medigap landscape
Medigap is commercial insurance that closes gaps in traditional fee-for-service Parts A (hospitalization) and B (outpatient services). Comparing the cost of Medigap with the risk of incurring high Advantage out-of-pocket costs depends on a couple factors.
Plan type: Until this year, the most comprehensive policies were C and F plans, but new sales of these policies has been discontinued starting next year. Beginning in 2020, the most comprehensive policies are D and G plans.
Location: Policy prices can vary quite a bit around the country, even though the plan types are regulated and offer uniform benefits no matter your location.
According to Medicare data, in Los Angeles, monthly D plan premiums currently range from $106 to $221; in New York City, the same policies range from $269 to $398.
What if your client moves?
Medigap plans are sold and regulated by states. If your client moves to a different state after buying a policy, there is no guaranteed issue right, but carriers often will transition her to a local version of the same letter policy, possibly with a price increase.
