When You Need to Decide
If you are over 65 you are probably already enrolled in Medicare. Current Medicare enrollees have between October 15 and December 7 to switch plans if they so desire. Medicare permits people to choose new plans during this annual “open enrollment” period, usually with no adverse coverage or pricing consequences. (Medigap policies are an exception—a new policy may require “medical underwriting,” meaning that you may be charged more or even turned down for health reasons.) Few people take advantage of this opportunity, and as a result, they often end up with plans that cost too much and cover too little.
If you will turn 65 soon, you will need to enroll in Medicare. Those who are turning 65 soon have an “initial enrollment period” of from three months before to three months after their 65th birthday.
If you are a current Medicare enrollee considering making changes to your coverage, or if you are enrolling for the first time, I would suggest that you start by reading my earlier article, “Your Guide to Medicare,” before diving into this one. There I provide more background information and more complete coverage of the subject of Medicare.
There are two broad types of Medicare: traditional Medicare (TM) and Medicare Advantage (MA). The purpose of this article is to help you decide which of these two options is right for you.
The Basics: Traditional Medicare vs Medicare Advantage
Traditional Medicare is comprised of (at most) four parts:
- Part A – Hospital care
- Part B – Outpatient care and doctor visits
- Part D – Drugs (from private insurance companies)
- Medigap insurance – optional, but valuable to limit out-of-pocket expenses
Traditional Medicare is still often perceived as the default choice. It is a “fee for service” (FFS) kind of insurance in that it pays health care providers directly for the services that they provide to the Medicare enrollee. TM offers great flexibility, since it enables you to see any provider that accepts Medicare, which is the vast majority.
Medicare Advantage plans combine coverage similar to Part A, Part B, Part D, and Medigap. That means shopping for it is simpler than shopping for the two private parts of TM, which are Part D and Medigap. One choice rather than two separate ones.
All MA plans have out-of-pocket maximums. The only way to cap out-of-pocket expenditures with TM is with a Medigap policy. I believe that it is vital to have an out-of-pocket maximum whichever you choose. Otherwise, a really serious illness or injury (one that runs into the $ millions) could ruin you financially. Many people foolishly neglect to buy a Medigap policy when they sign up for TM. One of the good things about MA plans is that this coverage is automatically included.
Nearly all MA plans are of two types—either a health maintenance organization (HMO) or a preferred provider organization (PPO). HMOs generally require you to receive all your care in their networks and sock you with high out-of-network costs. Your primary physician needs to coordinate your care and is the gatekeeper for any referrals you might need. These are generally the cheapest MA plans. PPOs offer you broader access to doctors and hospitals outside of network than HMOs, and you usually don’t need referrals from your primary doc. If you want to go to a special hospital in another state for treatment, a PPO will let you do this. Of course, as with everything, this freedom usually costs you in terms of higher premiums and more out-of-network care charges. PPOs have not one but two sets of annual out-of-pocket limits—one for in-network and the second for out-of-network care.
How the Economics Behind the Two Differ
Traditional Medicare (TM) is a “fee for service” (FFS) program. Health care providers are directly compensated by the government when services are rendered, and payments are based on a detailed schedule of services and related payments.
Under Medicare Advantage (MA) programs, the federal government makes “capitated” payments to the insurance companies providing the plans, meaning a per-enrollee payment. Payments are adjusted based on health and other factors. MA plans are required to limit an enrollee’s out-of-pocket expenditures. Prescription drug coverage is provided in virtually all MA plans, and most also offer dental, vision, and hearing coverage as well. In contrast, under TM beneficiaries must enroll in separate “Part D” programs to obtain drug coverage, and dental, vision, and hearing coverage are not provided. In addition, TM beneficiaries must enroll separately in a Medigap insurance policy to obtain a cap on out-of-pocket expenditures.
The competitive landscape between TM and MA has shifted over the years. In the early years, MA plans were paid only about 95% of the per capita cost of comparable TM costs. Over time, as MA became more popular, it garnered more political support and Congress changed the rules to favor MA plans. By 2009, MA plans were being paid 14% more than comparable TM per capita expenditures. Then, the Affordable Care Act of 2010 significantly tightened up on the payments to MA insurers, so that now the average payment to MA plans only slightly exceeds the average per capita expenditure for TM. (The recent average has been about 1% higher payments to MA plans compared to TM.)
Under the current system, MA plans submit bids to the federal government to provide Medicare-covered services to their enrollees. The bids are compared to a “benchmark” rate that is based on the expenditures for TM enrollees within the same geographic area (usually a county). If a bid is less than the benchmark, the plan may keep a portion of the difference in the form of a “rebate” which must be used to provide extra benefits to the enrollees. If the bid is above benchmark, enrollees pay the difference in the form a premium. Benchmarks range from 115% of traditional Medicare costs in counties with relatively low per capita costs to 95% of traditional Medicare costs in counties with relatively high per capita costs. Actual payments to plans are then adjusted for health status and other factors. Since 2012, plans have also been eligible to receive bonuses if they meet certain quality metrics.
Some of the providers of MA plans are the same health insurance companies that provide plans for private employers: Aetna, Cigna, United Healthcare, Anthem, Blue Cross/Blue Shield, Humana, and Kaiser Permanente are among the largest. These health care plan providers each negotiate separately with health care service providers. The government doesn’t negotiate, it just sets the rates that it will pay for services to Medicare enrollees. It is a take it or leave it proposition, and most providers are more-or-less forced to accept what Medicare pays because of the large number of TM enrollees.
Often employer-based private plans provide higher levels of compensation to health care providers than are provided by traditional Medicare. However, studies indicate that MA plans tend to use the level of TM payments as a ceiling on their own payments, and on average tend to pay physicians somewhat less even than TM. MA plans also succeed in negotiating lower prices for those health care services for which TM overpays compared to private insurance payments. In these cases, it is private insurance that functions as a ceiling for MA payments. In addition, there is also some evidence that MA plans may more closely scrutinize the coding that health care providers must submit in order to be paid compared to TM, policing any tendency towards “up-coding” that may not be caught by the TM system.
Most providers of MA plans are for-profit organizations, so they have an economic incentive to save costs. On the other hand, the MA providers know that they will all receive a rating by the government, and if they are rated poorly it will crimp their ability to gather new enrollees. Also, because the government pays annual bonuses for providers with good outcomes (3.5% to 10%), they have an extra economic incentive to score well on the 40-point five-star system used.
Premiums are usually lower for MA plans compared to similar TM coverage. (A comparable TM combination to MA would have to include Parts A and B, Part D, and Medigap.) In fact, about half of all MA enrollees pay no monthly premium at all (except for Part B), partly because MA plans use “rebate” dollars to reduce plan premiums.
Inflation Reduction Act
There may be an unexpected change in the competitive landscape ahead. President Biden’s Inflation Reduction Act requires substantial cuts in funding for Medicare Part D coverage starting in 2025. The private plans that provide stand-alone coverage for Medicare's prescription-drug program currently draw on three sources of revenue to finance prescriptions: 1) out-of-pocket co-payments from patients, 2) premium payments made by plan members, and 3) subsidies from the federal government. Under the Inflation Reduction Act, both government subsidies and out-of-pocket co-payments by patients are scheduled to be cut sharply—by some 25% to 30%. The difference will have to be made up by premiums. But the statute inhibits premiums from increasing more than 6% per year. That's hardly enough to make up the difference.
The unintended consequence of the Act will be to make standalone Part D coverage uneconomic for insurers to provide. Either they will have to find ways to drastically reduce costs, probably by cutting back on the drugs covered, or they will be forced to exit the market. The same squeeze will also be applied to Medicare Advantage providers which bundle Part D coverage within their plans, but they have more flexibility to reduce benefits in ways that may not be so obvious or painful to enrollees because of the breadth of coverage that they provide.
In my research for this article, I spent quite a bit of time reading various journal articles and academic papers attempting to measure differences in the quality of care between traditional Medicare and Medicare Advantage. I had hoped that the results would be compelling, but they aren’t. Outcomes are very similar between the two. Medicare Advantage plans tend to score better than traditional Medicare on some quality metrics, but the results are mixed, and the data are limited.
Among Medicare Advantage plans, there are noticeable quality differences among various types of MA plans: HMOs tend to outperform PPOs, plans run by hospitals outperform those run by insurance companies, non-profit organizations outperform for-profit, and those with more experience outperform those with less.
Differences between MA and TM plans also emerge when focusing on particular aspects of medical well-being. MA plans are better at fostering preventive care, as expected. Perhaps not as expected is the fact that hospital readmission rates are lower for MA than TM. On the other hand, there is some evidence that enrollees with the costliest medical conditions tend to leave MA plans and switch to TM. This may be because MA plans discourage them from continued enrollment or because the enrollees believe that TM is more likely to provide reliable and generous coverage, since there is no profit motive involved.
Who Tends to Select Which?
In my research, I also looked into the question of whether there are factors that tend to segregate TM enrollees from MA enrollees. Here again, the data is inconclusive.
Medicare Advantage plans tend to be more prevalent in urban areas, perhaps because the higher concentration of potential enrollees attracts more providers to offer more plans. The demographic characteristics of MA enrollees reflect their more urban tilt. TM enrollees tend to be white, whereas MA enrollees are more often black and Hispanic. TM enrollees are more like to have gone to college, whereas more MA enrollees did not finish high school. Income levels skew somewhat higher for TM and lower for MA. Overall health tends to be somewhat better for MA enrollees, with lower levels of cognitive or functional impairment. I had assumed that TM enrollees would be decidedly older, but the difference is not statistically significant.
Structuring Your Decision Process
It is a well-documented fact that when consumers are faced with too many choices, they often make poor decisions. This is especially true when the products are complex, and the associated terminology and features are unfamiliar. People freeze and do nothing. Or they make choices that are not in their own best interest.
You will want to structure your decision-making process. Logically, the first level of the decision tree is: traditional Medicare vs Medicare Advantage.
The most important criteria in choosing which type of coverage is right for you (TM or MA) will likely include the following:
- How likely are you to need medical care in more than one geographic area? For example, if you have more than one home, it is less likely that a Medicare Advantage plan will have adequate coverage in both places. Also, if you travel a lot, say in a recreational vehicle, you are more likely to need the flexibility of coverage that traditional Medicare provides.
- Will the requirement of getting a referral to see a specialist bother you or are you likely to want your personal care physician (PCP) to guide your selection of a specialist anyway? Some people like doing their own research and would value the flexibility of being able to select specialists themselves. Others would rather defer to their PCP in making these choices.
- Do you have other coverage for dental, vision, and hearing expenses (for example, from a former employer), or do you spend out-of-pocket for those needs? TM does not include any of those coverages, but most MA plans do.
- How important is saving money to you? Traditional Medicare, combined with separate Part D drug coverage and separate Medigap coverage (all are extremely important) will usually cost more than a bundled Medicare Advantage plan with similar, or greater, coverage benefits. In fact, about half of MA plans have no premiums at all.
- If you are enrolled in TM and have a Medigap policy (and in my opinion, everyone in TM should), you should be aware that if you switch away from your Medigap policy you may not be able to get back in without medical underwriting. If you have poor health, you may be turned down for coverage unless you are covered by “protected enrollment” because you have moved outside of your Medigap plan’s service area, you have involuntarily lost your coverage, or it is your first year of coverage.
Finding the Right Plan
You don’t need to have already made a final decision between traditional Medicare and Medicare Advantage before looking at specific plans. You can take you what you learn in your search for a specific plan to help you make a final choice.
Fortunately, the internet can make exploring your options fairly easy and efficient.
Before you start searching for plans, it is a good idea to have a list of all of your health care providers (doctors) and medications (including dosages), as well as your preferred drugstore(s) and hospital(s).
Armed with this information, go to https://www.medicare.gov/. The website will ask you to enter your list (if you register it will save the list for you) and then the software will sort through available plans and tell you roughly what a year’s worth of these drugs will cost you. Make sure you include your preferred pharmacy choices here, so that you can see whether a plan works with your pharmacy and how this may affect costs. (I would include all of the pharmacies that are convenient to you to give yourself as much flexibility as possible.) Just browse to medicare.gov and click on “Get Started.” Then “Get the basics,” then “Learn based on my situation.” The web pages will ask a series of questions and guide you to pages that will present you with various insurance options to choose from based on your situation.
You will want to register on the site so that you can save all of the information that you enter. You can do a lot of your initial screen at https://www.medicare.gov/. Click on “Find Plans” and answer a few questions and you are on your way. Before you make a final selection, you will want to get more information on the particular plans that interest you the most. Just click “View Details.” At the bottom of the screen click “View plan website.”
When it comes time to actually sign up for Medicare, you will be directed to this web page: https://www.ssa.gov/benefits/medicare/.
My Own Experience
I had to make this choice myself when I turned 65 recently. I decided in favor of traditional Medicare instead of Medicare Advantage. I am somewhat distrustful of insurance companies. I fear that they may be inclined to save money and boost profits by refusing to approve my health care expenditures. I have read that although a high percentage of disapprovals on the part of insurance companies are eventually reversed on appeal, it turns out that most people do not contest insurance companies when they decline coverage, or if they start the appeal process, they give up in frustration before gaining satisfaction. Also, it is my sense that Medicare Advantage is structured to appeal primarily to those who prioritize saving money on premiums over flexibility and quality of coverage. I’m fortunate to be fairly affluent. I’m willing to pay out-of-pocket for dental, vision, and hearing needs. But if I get really sick, I want to be able to go to the best doctors in the U.S., which may not be in my network with a Medicare Advantage plan.
Although I decided that TM was right for me, I do not presume that it is right for everyone. There is a lot to be said in favor of MA plans, and they have grown to over 50% of the market for good reasons.
Using an Insurance Broker
You do not need to wade through this complex set of decisions on your own. Insurance brokers are paid by insurance companies to sell Medigap and Part D plans under traditional Medicare and to sell Medicare Advantage plans for those who choose that route. They do not cost consumers anything.
When it was my time to decide, I was very glad to have found a very experienced insurance broker: John Barbati (email@example.com) of Penn Health Insurance Solutions, Inc. I was so delighted with his service that I asked him to help me update this article. I highly recommend him.
Summary and Conclusions
- Start by reading my earlier article, “Your Guide to Medicare.
- Traditional Medicare (TM) offers the greatest flexibility—you can see any doctor anywhere in the U.S. that accepts Medicare, and nearly all do.
- Medicare Advantage (MA) has become increasingly popular, and now has about 50% of the Medicare market, for good reason.
- TM doesn’t offer dental, vision, or hearing aid coverage, but most MA plans do.
- In exchange, you may have to give up some flexibility by staying “in network” or paying a premium to seek care out of your MA network.
- Most MA plans are either HMOs, which require referrals from a PCP to see a specialist, or PPOs, which do not require referrals, but which charge a premium for out-of-network services.
- HMOs are generally cheaper than PPOs. In fact, many HMO MA plans have no monthly premiums at all.
- Quality of care comparisons may slightly favor MA plans, but the data are sparse and relatively inconclusive.