Is there an advantage to a Medicare Advantage plan?
The second highest cost on average for any retiree is their health care.
The first is their home. Keeping that in mind, it makes sense that one of the most important financial decisions a person will make in retirement is their health insurance coverage.
Unless you have coverage through an employer plan or are retired Military, Medicare will be your health insurance. Even retiree plans utilize Medicare as their funding vehicle with some other supplemental option. For example, in PA retired teachers have HOP. The point is that once you are on Medicare, you will be making a choice for additional coverage. Alone Parts A and B Medicare have deductibles and co-insurance that leave the Medicare beneficiary exposed to high costs and A and B Medicare do not cover prescriptions.
There are two coverage options within Medicare. One option is to keep Medicare as primary insurance and pick up a Medicare supplement plan which the government calls “Medigap.” In addition, you will need a Part D prescription drug plan.
The other option, called Medicare Advantage, was created back in the late 90s. Medicare Advantage plans are privatized plans that combine Medicare Parts A, B and D into one plan with a private insurance company. They are also called managed care plans because they use networks such as health management organizations or preferred provider organizations. (HMO or PPO)
Basically, the Medicare beneficiary signs up with the private company (think of all the most popular insurance companies in your area). Once that person signs up with the company, the federal government provides a subsidy to the insurance company called a “capitation rate”. The typical cap rate can be around $10,000 per year per insured.
The company sets up a plan which must have minimum standards of coverage as dictated by the federal government. They typically do not have deductibles, however there is cost sharing per service through co-pays and co-insurance which gives them familiarity that people understand.
For example, there are doctor co-pays similar to what you find on most employer plans. In addition, the plans have cost sharing for virtually every service such as imaging, ambulance, hospital stays, and rehab. The higher the cost of the services, the higher the cost sharing to the insured. All plans vary in benefits. There is a cap to the cost sharing called the Maximum Out of Pocket or MOOP (calculated on a calendar year).
A typical PPO in Pennsylvania is $6700 in network or $10,000 out of network. If the Medicare beneficiary is in poor health and heavily uses their plan in a given year, they will receive plenty of bills. Also, the insurance company is the gate keeper for your care, not the federal government anymore. Insurance companies do not tend to be as liberal with approving services as straight Medicare tends to be. Keep in mind, insurance companies are set up to make profits.
Over 10 years, I have explained this to thousands of folks going on Medicare and I get the same response “So what’s the advantage of an Advantage Plan?” At this point I know they get it. The true answer is that a person can save monthly premium dollars in a low-cost Medicare Advantage plan over paying for an individual supplement and prescription plan. The question becomes, what are you getting in return?
So why are 30% of the Medicare beneficiaries signed up for these plans and growing each year? That’s simple, Marketing! There is lots of money to be made by the insurance companies. Why else would they invest billions in marketing?
Keep this in mind. Medicare on its own operates very efficiently. Administrative costs are less than 3% and they have no marketing costs to deal with. Private insurance plans Medicare or not do not operate as efficiently. Administrative costs are much higher. Some estimate between 12-18%. Now add the marketing costs to that and remember that insurance companies are for profit entities. All you need to ask yourself is who pays the higher administrative and marketing costs? Then go look in the mirror for your answer.