Whether signing up for Medicare for the first time or making changes to your coverage during the yearly open enrollment (October 15-December 7), one of your most basic decisions involves choosing between traditional (original) Medicare or one of several Medicare Advantage being offered to you. In traditional (original) Medicare, the federal government oversees your coverage and in a Medicare Advantage plan, a private (for-profit) health insurance company manages your coverage. In this blog post, I will be giving a basic overview of the Medicare Advantage option.
For Medicare Advantage plan enrollment, you must have Medicare Parts A (hospital) and Part B (medical) and live in the plan’s service area to be eligible. If you cannot afford the Part B premium ($121.80+ for new enrollees in 2016), financial assistance through a Medical Savings Program or through the Medicaid program may help you qualify for this basic Medicare Advantage enrollment requirement.
Medicare Advantage and Employer Health Insurance Comparison
Medicare Advantage plans are similar to the managed care, employer-sponsored health insurance plans most of us know today. They both provide a package of minimum health insurance benefits (Essential Health Benefits versus Part A + Part B Medicare) and a share of the total health insurance premium is paid by a sponsor (the employer versus the federal government). In both cases, coverage details are defined in a plan contract and coverage disputes are managed by the private health insurance company. While the most popular plan type in employer-sponsored health insurance plans is the Preferred Provider Organization (PPO) with 52% of the enrollees (in 2015), the HMO is the most popular Medicare Advantage plan type with 64% of Medicare Advantage enrollees (in 2016).. Both employer-sponsored and Medicare Advantage plans have individual risk pools of various sizes. In the employer-sponsored health insurance plan, the premium is priced for the employees as a group and the premium is shared with an average 82%/18% split between the employer and the employee in 2015 . In the Medicare Advantage plan, federal government gives each insurance company a fixed premium (called a capitation payment) plus a risk-adjusted amount per enrollee for insuring a group that is sicklier (i.e., have a potential for higher expenditures) than the local traditional Medicare population. This comparison between employer-sponsored health insurance and Medicare Advantage is shown in the figure below.
In traditional (original) Medicare, the federal government pays healthcare providers directly using contractors to handle the administration. In contrast, our federal government hands over the capitated payments to Medicare Advantage plans which in turn uses the money to manage Part A and Part B benefits. The insurance company negotiates, enters into contracts with, and pays a select network of healthcare providers to supply services for its beneficiaries. The flow of money for healthcare services for Medicare Advantage and traditional (original) Medicare is shown in the figure below.
I have also included a provider in the figure above who does not accept Medicare assignment (in red) so that you are aware that although a small percentage of the total healthcare providers who practice in the United States, they still do exist and should be avoided if an alternative assignment-accepting practitioner is available.
Apart from the money flow structure described above, there are many other differences between traditional (original) Medicare and Medicare Advantage plans. Medicare Advantage enrollees are usually responsible for an extra plan premium when the capitated payment from the government falls short. They are also guaranteed a maximum in-network, out-of-pocket spending cap ($6700 or less in 2016). Traditional Medicare enrollees are given no such guaranteed cap for out-of-pocket spending and therefore when sick can spend a limitless amount of money. While both groups of beneficiaries are guaranteed a well-defined benefit package under federal government rules, Medicare Advantage enrollees must follow an additional layer of coverage rules defined in the Medicare Advantage plan contract (the details of which vary from plan to plan). Failure to follow the details of coverage rules and insurance reimbursement will be higher than expected or even denied altogether.
To get the lowest cost health care, Medicare Advantage enrollees are required to use the services of healthcare providers who are a part of the plan’s network. Going out-of-network can be very costly. Traditional Medicare enrollees are free to seek the services of all healthcare providers who accept Medicare across the country (no network) and the lowest costs are obtained using providers who accept Medicare assignment (the vast majority).
I have highlighted the differences between traditional (original) Medicare and Medicare Advantage described above in the figure below.
In addition Medicare Advantage plans are allowed to offer more comprehensive coverage than traditional Medicare can. Many include some eye, hearing, and dental coverage benefits. The majority (87%) of Medicare Advantage plans are bundled to include prescription drug coverage (Part D) with its Part A and Part B coverage (called MA-PD plans). Traditional Medicare beneficiaries must purchase this benefit separately through Medicare Part D.
Medicare Advantage Plan Types
Many of the plan types available are the same as found in employer-sponsored health plans and some are particular to Medicare Advantage plans. Medicare Advantage plans include:
- Health Maintenance Organization (HMO)— usually limits coverage to care from a network of providers that are under contract with the plan in a specific locality.
- HMO Point-Of-Service (HMOPOS) plans-–combines the traditional HMO for local coverage and a Point of Service (POS) coverage when out of network at a higher out-of-pocket cost. This is the HMO’s answer to health coverage for people who might want to travel outside of their local coverage network . This benefit can make the plan function more like a Preferred Provider Organization (PPO) plan.
- Preferred Provider Organization (PPO)—often subdivided into those with larger geographic networks (regional) and those with more localized networks (local). PPO plans have more flexibility than HMO plans. There is no primary care physician gatekeeper and you can go to a specialist directly. You can see doctors inside (at lowest cost) or outside your network (at higher cost).
- Private Fee-For-Service (PFFS) plans– just like traditional Medicare under a private insurance company’s control with possibly fewer healthcare providers (some have networks).
- Special Needs Plans (SNPs)–for people with specialized health needs (people with a severe or disabling chronic condition like dementia) or who are in specific situations (a nursing home).
- Medicare Medical Savings Account (MSA)— a high-deductible health plan combined with a bank account for you (similar to the HSA-qualified High Deductible Health Plan (HDHP) available to employed people) . Medicare deposits a particular amount of money each year into the bank account, and you can use the money to pay for any expenses related to your health care throughout the year.
In 2016, 94% of all Medicare Advantage enrollees are found in three of the plans above: 64% in HMOs, 23% in local PPOs, and 7% in regional PPOs. In addition, HMO enrollees are concentrated in select urban markets where HMO infrastructure is well-established.
Medicare Advantage Costs and How to Choose?
In addition to a possible plan premium, all Medicare Advantage plans have cost share (deductibles, copays, and coinsurance). Just like in employer-sponsored managed care health plans, the higher the plan premium, the lower the cost share and the greater the choice of healthcare providers. A zero dollar premium Medicare Advantage plans might not always be the most affordable option when a limited network forces you to seek out-of-network care and higher expenses. For many relatively healthy beneficiaries who do not anticipate using many healthcare services, especially in areas of the country with strong HMO presences (urban California and Florida counties), Medicare Advantage plans are often a cheaper alternative to traditional Medicare. Because they are run by private for-profit companies, potential enrollees should know that it is important to look at the details of any given plan before signing up.
If more than one type of Medicare Advantage plan type is available to you where you live, choosing between them requires making trade-offs (cost, plan restrictiveness, etc.). When you compare Medicare Advantage plans, keep in mind the type of health services you need, how often you get them, what medications you take, and the copayments or coinsurance amounts for these drugs and services under the different plans.
Helpful websites and documents:
Medical Rights Center’s article “Differences Between Original Medicare And Medicare Advantage Plans
What’s a Medicare Advantage Plan?
Medicare Advantage, May 11, 2016, Kaiser Family Foundation –the source of many of the enrollment statistics given in this blog.