Financial Insights

Original Medicare and Medicare Advantage Plans

As we mentioned a few weeks ago, the annual Medicare Open Enrollment (Oct 15 – Dec 7) allows consumers to shop their Part D prescription plan and Medicare Advantage plans.  Open Enrollment is accompanied by an aggressive marketing blitz for Medicare Advantage Plans (Joe Namath and other celebrities), which can create confusion for consumers.

The explosion of HMOs and PPOs in the 1980s and 90s, when more Americans became used to getting care through a single, comprehensive care network while they were working, led to the creation of Medicare Part C in 1997, which is now Medicare Advantage (MA).  MA plans are available through private health insurance companies and offer a one-stop-shop alternative to original Medicare.

Ever since MA plans became available, Medicare enrollees have had a decision to make:  choose original Medicare or become a member of a MA plan.  A key distinction between the two it s that original Medicare is pay-per service health insurance while MA plan providers get paid a lump-sum by the federal government every year to provide all your care.

MA plan enrollment initially started slowly, but has since grown rapidly.  The monthly cost is less expensive than original Medicare when you are younger/healthier and many people are already familiar with having a network (in-network, out-of-network) of providers to choose from through their employer coverage.  As a result, enrollment grew +10% just from 2020 to 2021 and total enrollment in MA plans is projected to represent 55% of all Medicare enrollees by 2030.

Part of the reason for the rapid growth of MA is the extra benefits MA plans provide, including prescriptions, telehealth, dental, vision, hearing, fitness, and even transportation, meal benefits and home modifications.  These extra benefits began to expand in 2003, when Congress concluded that if MA plans were able to provide medical care to members for less than what Medicare costs, then the savings must either be applied to lower patient costs or toward extra benefits.

You may have read or heard more recently that members of Congress have proposed adding some of these additional benefits to original Medicare, which reflects the current benefit imbalance between MA plans and original Medicare.

Another reason for MA’s increasing enrollment is the one-stop-shopping aspect.  Enrollees in original Medicare must shop for Part D coverage for prescriptions separately and typically also choose a supplement or “Medigap” plan to cover health costs not covered by Medicare.  Additionally, if they want dental or vision coverage, then they have to shop for these separately.

And then there is the aggressive marketing of MA plans, which original Medicare does not do.   The average number of MA plan options available to a typical enrollee is currently 30+ even though the market for MA plans is dominated by five insurance companies that control almost 80% of the MA market (United Healthcare -27%, Humana – 18%, BCBS – 14%, CVS – 11% and Kaiser Permanente – 7%).  Enrollment in MA plans varies widely be geography across the U.S., covering 50%+ of enrollees in FL and MN, for example, versus less than 5% of enrollees in WY.

Beyond the discrepancy in benefits offered, the primary difference between original Medicare and MA is your access to care providers.  Under original Medicare, you can go to any provider in the U.S. who has signed up to treat Medicare patients (90%+ of providers) and you effectively have control over who you can see and where and when you can see them.

With an MA plan, you typically have a closed panel of doctors who practice in one location (i.e. your care is coordinated by that medical group).  If you go outside the group (out-of-network), then your plan likely will not pay for it or, in some cases, you can go outside but you’ll pay a lot more.  You’ll need pre-authorizations for procedures and you’ll need referrals from a primary care physician to see specialists. HMOs are generally more restrictive than PPOs, but both are more restrictive than original Medicare.

Unlike original Medicare, your MA plan can change the benefits provided and/or your providers can opt of your current plan (become out-of-network), which is why the Open Enrollment period was created to allow you to shop your MA plan each year.  The Plan Finder tool on www.medicare.gov allows you to shop both Part D prescription plans and MA plans.

The MA plans you can shop for are accompanied by a “star rating”, which is a system the federal government uses and encompasses 40 performance measures (availability, patient satisfaction, response time to denial of care, etc).  About 10% of plans earn a 5-star rating today, while 71% earn 4-stars and 14% earn 3-stars.  Plans rated at least 4-stars receive “performance bonuses” and given that this represents 80%+ of available plans, there is some controversy over whether the rating system actually works.  The Medicare Payment Advisory Commission (an independent congressional agency created the same year MA plans first became available) believes that the star rating system should be replaced.

There is also controversy over whether MA plans cost taxpayers more, or less, than original Medicare.  MA providers bid their plans to the government each year based on how much they expect it will cost to deliver care to members.  The average of these bids is meaningfully less than what they say it costs for pay-per service original Medicare.  But it depends on who is doing the calculations.  The Medicare Payment Advisory Commission indicated in a report this year that MA plans have not cost less than original Medicare, but rather for the last 20 years they have paid more per enrollee through MA plans than for an enrollee in original Medicare.  They recommend reforming MA plans to be on par with original Medicare payments, which could save taxpayers billions of dollars.  And, as you may expect, MA providers disagree.

Regardless of the controversies over the start rating system and whether MA plans save taxpayers money or actually cost them more, the reality is that MA plans are here to stay, will remain popular and aggressively marketed and the trend is that Medicare will continue to look more like the marketplace for private health insurance you became used to while you were working.

When it comes to care, MA plans are considered a better option when folks are younger/healthier.  MA premiums are less expensive than original Medicare when combined with a Part D plan and Medigap plan, they include one-stop-shopping for multiple benefits, and the actively promote preventative care, which helps plan providers them keep their costs down.  The tradeoff is the limited choices for specialists or hospitals when people get sick and particularly when there is a need for more serious of unique treatments of health issues.  This can create significant out-of-pocket expenses and frustration with affordability, network limitations and denials.

As a result, people with complicated health issues are generally less satisfied with MA plans and people who are sicker tend to disenroll from their MA plan and switch to original Medicare, particularly later in life.

If you are thinking, ok, I’ll start with an MA plan while I’m young and healthy and switch to original Medicare later in life, then you need to think again because this carries a big risk.  Original Medicare covers about 80% of your medical expenses and, as a result, most enrollees in original Medicare purchase a supplement plan to fill in some or virtually all of the 20% gap.  But unless you purchase your Medicare supplement plan within six months of when you initially enroll in Medicare Part B, then you are not guaranteed coverage (with the exception of a couple of states).  As a result, you may have to pay more for a Medigap plan or you can be denied coverage if you have a pre-existing health condition if you attempt to obtain a Medigap plan after your initial enrollment period.

So the big decision comes when you are initially enrolling in Medicare Part B.  Do I choose original Medicare?  Or do I choose a MA plan?  (You pay the monthly Part B premium and any surcharges based on your adjusted gross income whether you have original Medicare or a MA plan.)  There is no “right decision” and it really comes down to your personal health situation and your budget.

An MA plan might be cheaper initially and you may be comfortable with a limited pool of in-network providers or having to switch plans at some point to get access to providers that meet your needs.  And the premium savings early on vs. original Medicare may help to offset potential higher medical expenses later in life.  Some of the additional benefits, like a transportation benefit, may be useful if the point comes where you can no longer drive yourself to an appointment.

The dental, vision and hearing coverage may seem appealing, but if you have any of these already (while you are working), then you may already know that they typically don’t cover much beyond basic preventative services, which is what you should expect and for which the cost is probably near or equal to the annual premium you are paying.

If you already have health issues and/or if access to your preferred providers is important to you, then you’ll have more control over who you can see with original Medicare.  And with a comprehensive Medicare supplement plan, you’ll effectively have all of your medical costs covered with the exception of the annual Part B deductible ($217 for 2022).  For those who can afford it, then the extra cost of original Medicare provides peace of mind.

If you plan to spend time in multiple states in retirement, then original Medicare may also be a better option.  The MA plan that you purchased up north may result in having to see out-of-network doctors in Florida so you need to take this, and any details of a potential MA plan, into consideration.

And for those who are currently paying for individual health insurance (versus subsidized coverage through a group employer plan) in your early 60s, then you know how expensive your premiums are today and switching to original Medicare at age 65 is typically welcome as it will result in lower premiums and it makes the decision to choose original Medicare easier.

If you already are enrolled in a MA plan, then here a few considerations for open enrollment and whether it makes sense to shop and potentially change plans:

My regular doctor is no longer in-network in my plan – ask whether he/she is moving to another plan and potentially consider moving to the plan they take.

My prescription costs have increased or my medicine is no longer covered – shop plans to see if you can find what you need or a lower cost elsewhere.

I need surgery or prefer a specific doctor – shop to see if your preferred providers are in-network through another plan.

I’m super healthy and rarely see a doctor – if you are paying anything for a MA plan on top of the Part B premium, then shop to see if you can find one that only charges the Part B premium or perhaps one that does not include a bunch of the extra benefits you are not using.

My income has dropped – shop to see if you can find a cheaper plan.

Hopefully, this will help clarify why you are being bombarded with MA advertising this time of year along with choosing between original Medicare versus a Medicare Advantage plan.

Health care costs become a significant part of expenses for most people in retirement.   The difference between a plan that meets your needs and one that doesn’t can add up over the course of a normal retirement today.   Please make sure that you and your advisor are taking health care costs into consideration as part of your retirement plan.  And be sure to reach out to your ACM Wealth Advisor if you have questions.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

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