There are two basic options for those on Medicare: Original Medicare and Medicare Advantage. In this blog I’ll walk through the pros and cons of each. I’ll first discuss the components of Original Medicare and then the alternative, which is called Medicare Advantage.
Original Medicare
Medicare, the medical insurance program for seniors, was introduced in 1965. There are various parts to the program.
Part A. The first component is Part A, which covers hospitalization and nursing home care. Most Medicare beneficiaries do not pay a premium for Part A if they worked long enough to qualify for Social Security benefits. Medicare Part A has a $1,364 deductible, after which Medicare pays for eligible costs for 60 days. The beneficiary would then pay $341 per day for the next 30 days and $682 for 60 days beyond that. After that, Medicare would stop paying.
Part B. The next component is Part B. This covers doctors, urgent care, medical equipment, etc. There is a monthly premium of $135.50 for Part B, unless your income exceeds certain thresholds, in which case there is a Part B premium surcharge. Part B has an annual deductible of $185, after which Medicare generally pays 80% and the beneficiary pays 20%. There is no out-of-pocket maximum. You could potentially have to pay 20% of a very big number.
Supplement Plans (Medigap). Because there are significant potential gaps in coverage with Medicare Part A and B, most beneficiaries who sign up for original Medicare also purchase a Medicare Supplement (or Medigap) plan. These plans typically cover the Part A deductible, Part A beneficiary copay for days 60 to 150, and provide coverage for an additional 365 days beyond that. These plans generally also cover the 20% of Part B that the beneficiary would otherwise be responsible for.
There are several Medicare supplement plans (Plan F, Plan G, Plan N, etc.). These vary in how much the premium is and how much of the out-of-pocket costs they cover. These plans are standardized by carrier. Plan N, for example, covers all costs except for the $185 Part B deductible and $20 per doctor visit. This benefit will be exactly the same for all insurers that offer Plan N. The only difference will be the premium charged. For a 65-year-old first signing up for Medicare, the typical monthly premium for Plan N (which is the most popular with my clients) might be $110 but will increase each year.
Part D. The final piece of the puzzle is prescription drug coverage (Part D), which was introduced in the early 2000s. Prescription drug plans are offered by private insurers who receive subsidies from the federal government. You will pay a premium for these plans that can vary from $12 per month up to more than $100 per month depending on the plan you choose. As with Part B there is a premium surcharge if your income exceeds certain thresholds. There are out of pocket costs as well. The plan that will be the most cost effective will depend on the specific drugs (if any) that you take. If you do not take any prescription drugs when you first turn age 65 it might be tempting to skip a Part D plan but if you do so you will incur a penalty for the rest of your life when you do eventually sign up.
Thus, if you sign up for original Medicare you will have three premiums to pay and three cards to carry around with you (Medicare, Supplement Plan, Prescription Drug). The typical monthly cost is around $300 for all three components for younger beneficiaries. The big variable is prescription drugs. Someone taking expensive brand-name drugs could experience significantly higher costs.
Medicare Advantage (Part C)
The alternative to original Medicare is Medicare Advantage (Part C), in which all the components of original Medicare are rolled into a single plan offered by a private insurer. These plans will feel very similar to a plan you might have had when working. You will have only one card to carry around with you. These Medicare Advantage plans might also offer additional benefits such as gym memberships and vision/dental care to try and entice beneficiaries to sign on.
The insurers receive fixed payments from the government for each enrollee and make money if they can provide the care needed at a cost lower than the combination of the government payment, any premiums collected, as well as deductibles/copays. The key to making this work for the insurers is to create networks of providers that agree to accept a lower reimbursement than what they would otherwise get from Medicare in exchange for being included in the network.
The tradeoff between original Medicare and Medicare Advantage is thus one of cost versus access. The most popular Medicare Advantage plans have zero premiums. Your only premium would be the $135.50 that you pay the government for Part B (assuming your income is not high enough for the Part B and Part D premium surcharges). Thus, you could conceivably save up to $150 per month assuming you do not incur meaningful deductibles and copays.
But the lowest cost plans will also have the most restrictive networks, typically HMOs or EPOs where there is no out-of-network coverage other than emergency care.
With original Medicare, by contrast, you can go see any doctor in the country that accepts Medicare at any time. If you want to hop on a plane to Rochester, Minnesota, to see someone at the Mayo Clinic you can do that.
Switching Plans
The other consideration is the ability to switch back and forth. Every year there is an open enrollment period where you can change prescription drug plans, change Medicare Advantage plans, switch to an Advantage plan from original Medicare or vice versa. The only exception is the Medicare Supplement plans, which do not have an open enrollment period. You can change anytime. However, unlike the other components of Medicare, supplement plans are subject to health underwriting (unless you sign up within a year of signing up for Part B). After that initial period, you can be rejected for coverage or charged a higher premium based on your health. If you decide to start with Medicare Advantage because it costs less with the idea that you can switch later to original Medicare, you may not be able to qualify for a supplement plan. On the other hand, you can always switch from original Medicare to an Advantage plan during open enrollment.
If you or anyone you know needs help sorting through their Medicare options, feel free to reach out.