One of the first and most important decisions Medicare beneficiaries must make when starting Medicare Part B is the decision between Original Medicare coverage (aka Traditional Medicare) combined with Medicare supplement insurance or a Medicare Advantage Plan.
Which you choose can determine the quality of care you receive and define the choices you have with your healthcare for the rest of your life. You can make a permanent mistake.
This article is intended to provide you with the information you need to make an informed decision. I will cover the the advantages of Medicare Advantage plans along with the disadvantages of a Medicare Advantage Plan to help you with your decision.
Key takeaway: Medicare Advantage Plans replace your Original Medicare operated by the federal government with health insurance managed by a private for-profit company. The majority of people who choose an Advantage plan do so because it fits their budget. Benefits are a secondary consideration.
What is a Medicare Advantage Plan?
Medicare Advantage plans are a pseudo private alternative to Original Medicare. Advantage plans are managed by private insurance companies for profit. These plans, originally called “Medicare Replacement Policies” were introduced in their current format to the federal Medicare program in 2003. Medicare Advantage Plans are regulated by Medicare, but they are not standardized. That means that the private insurers can design plans within the guidelines set by Medicare. Each plan is different, with different costs and benefits.
By design, all Medicare Advantage Plans are intended to be an actuarial equivalent of Original Medicare benefits (Medicare Part A and Medicare Part B). In laymen’s terms it means the average person on any specific Advantage plan should have roughly the same out-of-pocket costs as the average person who has Original Medicare with no supplemental coverage.
Does a Medicare Advantage Plan Have the Same Benefits as Original Medicare?
You may hear agents tell you that a Medicare Advantage Plan has all the same benefits of Medicare Part A and Medicare Part B. That is a common misunderstanding. It is more accurate to say that Medicare Advantage Plans have all the same benefit categories as Medicare Part A and Part B, not the same benefits.
What is the difference? One simple example can be often found with physical therapy. If you have Original Medicare Parts A & B, you will receive all the physical therapy treatments your doctor prescribes. Contrast that with an Advantage Plan where the insurance company determines how many physical therapy sessions you receive and seldom allows more than a fraction of what is recommended by your doctor. Both have benefits in the same category; physical therapy. But they do not have the same benefits.
Medicare Advantage Plans Replace Medicare
It’s critically important to understand that Medicare Advantage Plans replace your Original Medicare. They do not supplement Medicare or add enhanced healthcare benefits to your Medicare. They replace your Medicare Part A and Part B and sometimes Part D.
Benefits and Costs Change Annually
Medicare Advantage plans are annual plans. The benefit contract for each advantage plan ends on December 31 of each year. The plan starting the next year can have different costs and different benefits. This is important because it makes long-term planning difficult when you are uncertain of your health benefits and expected costs in the years ahead.
While there are many types of Medicare Advantage plans. In 2023 there were 3,998 different Medicare Advantage plans available, of which more than 80% are designed as either an HMO or PPO. HMO stands for Health Maintenance Organization. PPO stand for Preferred Provider Organization. For details on how these plans are constructed and how they differ please see my Medicare Advantage Plans Explained article and video.
In brief, an HMO typically controls medical care costs by utilizing a very limited network and uses a primary care physician to control when and if you can see a specialists. With a PPO you may be required to choose a primary care doctor, but you do not need that doctor’s permission to see a specialist.
Most Medicare Advantage Plans include bundled Part D prescription drug coverage.
Group Medicare Advantage Plans
The overwhelming majority of people who choose a Medicare Advantage Plan will choose an individual plan. However some large employers are offering group advantage plans to their retirees. Typically, the employer is incentivized to offer these group advantage plans.
As I review the pros and cons of Medicare Advantage plans below, please keep in mind that each feature is as relevant to group Advantage Plans as they are to individual Advantage Plans.
Why Are Some Medicare Advantage Plans Free?
Approximately 69% of the Medicare Advantage plans offered in the United States have no monthly premiums. We refer to these plans as zero premium or zero monthly premiums plans.
Medicare rules forbid licensed agents from referring to these plans as free, because they are not free. Each plan has its own set of deductibles, copays and coinsurance that are the financial responsibility of the Medicare beneficiary. Much of the cost of the plan is born by the limit in healthcare benefits, leaving the beneficiary to experience a higher maximum out-of-pocket cost than Original Medicare and a supplement.
In addition, every Medicare Advantage plan enrollee is still responsible for paying their Medicare Part B monthly premiums. If a person is subject to IRMAA (Income Related Monthly Adjustment Amount) they must still pay the IRMAA surcharge even with an Advantage Plan. For more on IRMAA see my article and video titled What is IRMAA?.
How Do Insurance Companies Make Money on Medicare Advantage Plans?
Of course, the first question that often comes to mind is that with no premiums for a Medicare Advantage plan and prescription drug coverage, how do the private insurance companies make money?
There are several ways that a Medicare Advantage insurance company will profit from offering insurance plans. First, because they are replacing the federal health insurance program, the US Government pays the company a monthly fee of approximately $1,000 +/- for each person they enroll. Medicare Advantage plans are subsidized by the tax payer.
Second, because these plans are private health insurance coverage, the company managing the Medicare Advantage plans will have processes in place to reduce their cost. This may include denying coverage or increasing the out-of-pocket costs of the Medicare beneficiary.
With the combination of government subsidies and control over your healthcare, Medicare Advantage plans are very profitable ventures with extra money for national advertising campaigns and the highest agent commissions of any Medicare plan. In some cases they even offer doctor’s bonuses to recommend their plans.
What Are the Advantages of a Medicare Advantage Plan?
Now that we know what a Medicare Advantage plan is, let’s look at some of the features of Advantage Plans that some Medicare beneficiaries find appealing.
Obviously, when comparing an Advantage plan to Original Medicare plus supplemental coverage the first feature many find appealing are the low monthly premiums. As noted above, according to the Kaiser Family Foundation 69% of Medicare Advantage Plans are available premium free. According to Medicare, the average monthly premium for a Medicare Advantage plan is just $58. The bundled Part D Plan may also have a monthly premium with the average being $35 in 2023.
Many Advantage Plans Include Prescriptions Drug Coverage
According to the Kaiser Family Foundation (KFF.org) 89% of individual Medicare Advantage Plans offer prescription drugs. Many Medicare Advantage members are attracted to the idea of a bundled prescription drug plan. Some Medicare Advantage plans have no premium for prescription drug coverage as well.
Keep in mind, there are no structural differences between a stand-alone Part D plan and one bundled with an Advantage plan. They have the same required guidelines, deductibles and maximum out-of-pocket.
Medicare Advantage Extra Benefits
Medicare Advantage Plans may offer Extra Benefits not available with Traditional Medicare. However, those additional benefits must be in some way health related. Additional benefits can also be restricted to subgroups of enrollees. For example, they may be benefits for people with specific chronic conditions or diabetes and so on.
The most common additional benefits are in the category of dental services, hearing and vision care. While the benefits may not be as robust as coverage that can be purchased individually, it is a welcome benefit to those on limited incomes without the resources for individual policies.
The most important advice we can offer regarding extra benefits is simply this: do not get carried away focusing on extra benefits instead of the primary reason for the insurance, your healthcare. We often refer to extra benefits as “shiny objects”. They are often used to distract you from weakness in the health insurance itself or network limitations. Focus and choose your plan based the quality of health insurance it offers, not the shiny objects.
Special Needs Plans
According to kff.org there are 1,156 Special Needs Medicare Advantage Plans offered in 2022. These include plans for people needing Institutional Care (I-SNP), Chronic Condition plans (C-SNP), and Dual-Eligible Special needs Plans (D-SNP for people eligible for both Medicaid services and Medicare).
A Special Needs Plans can be great benefit to people in those specific situations. The benefits are designed specifically for those conditions or that situation creating tailored insurance plans that control both the consumer and insurer health care costs.
Medicare Advantage Plans for people with special health care needs are a fast growing part of Medicare. But still, health care coverage insurance of this type not available in all communities.
No Medicare Underwriting
A great feature of Medicare Advantage plans is that the never require medical underwriting. A person can enroll in a Medicare Advantage plan regardless of their current or historical health as long as they have Medicare Part A and Part B.
Medicare Advantage Under 65
Medicare is not just for people 65 and over, it’s also for people under 65 who have been on Social Security disability income for at least 24 months, and for people of any age with specific medical conditions like ALS and ERD.
Unlike Medicare supplement plans, Medicare Advantage Plans are available in every state for people under 65. It can be their only option to purchase a plan that limits their maximum out-of-pocket health care costs.
If, after enrolling, you find the disadvantages of Medicare Advantage to be too cumbersome, you can switch back to Original Medicare.
Who Typically Chooses Medicare Advantage Plans?
It is often the case that part of the decision making process is to also understand the choices others like you have made with their Medicare. Did they choose Medicare Advantage Coverage or a Medicare supplement?
In my video and accompanying article titled Medicare Explained – Secrets of Who & Why I explore the demographics of people who choose Medicare Advantage plans vs Medicare supplements vs just keeping Traditional Medicare.
Studies by eHealth and Medicare.gov show that those who most often choose a Medicare Advantage plan are those with whom budget is the most important criteria in deciding on which health insurance plan is right for them.
While quality of health insurance is important, the premium cost and how it fits within their budget is the driving factor behind their decision to choose a Medicare Advantage Plan. Most Medicare Advantage plans have no monthly premium, which is very attractive to those on a tight budget.
Why Are Medicare Advantage Plans Bad?
Now that you are familiar with some of the advantages of choosing Medicare advantage plans, next we will cover the disadvantages of choosing a Medicare advantage plan for your health care medical insurance.
Disadvantages of Medicare Advantage
With Medicare Advantage Plans it is much more difficult to plan out or for your potential healthcare needs in retirement. The reason is two fold. First, an Advantage Plan is an annual plan. Every Medicare Advantage plan ends on December 31st of each year. With the New Year comes a new plan with different benefits and costs.
Any part of a Medicare Advantage plan can change each year. The premium, the copays, deductibles and benefits can all change. The network of health care professional can change along with the health care services offered. In fact, the maximum allowed out-of-pocket costs have increased by more than 25% in just the past three years.
The second issue is that every year some Medicare Advantage insurers go out out of business. Often, in the process of going out of business their service to the Medicare beneficiary suffers. Which means your health care can suffer. We encourage our clients to avoid new Medicare Advantage plans and plans from carriers that are small companies. Those are the most vulnerable to an unplanned exit from Medicare.
Local Coverage & Network Limitations
Unlike Original Medicare and Medicare supplemental plans, Medicare Advantage is local coverage.
Medicare Advantage HMO and PPO plans use a local network of doctors to manage your healthcare. In some cases you must only use your local healthcare providers that have joined your insurance provider networks. In other cases you are allowed to ask healthcare providers that are not in network if they would accept your insurance, but they can and often do say No.
Other than emergency or urgent care, any medical services you receive outside your provider networks will either be at a higher level of out of pocket expenses or you will be responsible for the entire cost without a maximum out-of-pocket limit.
Only 46% of doctors in the US accept Medicare Advantage plans. Even then, they may not accept your specific plan. You do not have the same level of choice of Medical professionals than you do with Original Medicare and Medicare supplement.
Inpatient Hospital Care
Another study by the KFF.org found that more than half of the Medicare Advantage plan recipients spent more for inpatient care than they would have if the had Medicare Part A.
Medicare Part A has a deductible of $1,600 and then 100% coverage for up to 60-days if care. With a Medicare supplement you can spend up to a year in the hospital and not pay a dime.
The Cost of Treating Cancer
Cancer treatment when using a Medicare Advantage plan is significantly more expensive than if you had Original Medicare and a supplement.
With every Advantage Plan I have seen, the beneficiary pays 20% of the their cancer treatment up the annual maximum out-of-pocket allowed by the plan. That out-of-pocket maximum resets every January 01.
Cancer treatment includes many of the cancer drugs that would normally be under Medicare Part B. Where there may be no cost with a supplement, you will pay 20% up to your maximum allowed when you use an Advantage plan.
In addition, a study published in the Journal of Clinical Oncology in 2022 showed that enrollment in Medicare Advantage plans increased the mortality rate for some cancers due to the inability to choose more experienced Oncologists.
Prior Authorization Required
Unlike Original Medicare with a supplement, when you have a Medicare Advantage Plan your doctor is required to seek prior authorization before performing any costly service other than emergency or urgent care.
A letter date October, 2021 to Medicare from the 5,000 member American Hospital Association pleaded to Medicare to fix the prior-authorization requirements and detailed some of the harm it caused
Medicare is attempting to fix the problem, but no solution has yet been finalized.
May Require A Referral
Among the cons of Medicare Advantage is that unlike a Medicare supplement plan, many Medicare Advantage plans attempt to save money by controlling your healthcare access. They require you to get the permission of your Primary Care Physician prior to seeing a specialist. That specialist must also be in the plan’s network. Of course, it may save money for the insurer, but often costs the beneficiary in quality and timeliness of care.
If you see a specialist without first getting a referral, your visits may not be considered covered services. In that case, you will pay 100% of the cost with no maximum out-of-pocket limit.
Prescription Costs Linked with Healthcare Benefits
Another one of the disadvantages of Medicare Advantage is that your prescription drugs coverage is tied to your primary healthcare. You cannot change one without changing the other.
When you seek to change your Medicare Advantage Plan during your Annual Enrollment period you must also consider how it impacts access to your doctors. Your doctor may not be in the plan’s network with the best prescription drug coverage or vise versa.
Medicare supplement plans and Original Medicare avoid this problem by allowing you to get a stand-alone Part D prescription drug plan. Something you cannot do with your HMO or PPO.
With a stand-alone Part D plan you shop for the best drug coverage each year and not disturb your Original Medicare or Medigap insurance.
Another issue with Medicare Advantage plans is that the bulk of the industry is controlled by three private companies. You may not have a robust choice of who provides your medical care. Too few Medicare Advantage carriers control the market.
United Healthcare and Humana account for 46% of all Medicare Advantage enrollments nationwide. Private health plans from these two companies account at least 75% of all Medicare Advantage enrollment in 29% of counties nationwide.
BCBS affiliates like Anthem account for 14% of enrollments. That’s 60% from just three companies. The next three companies account for 24%, making just six companies controlling 84% of all Medicare Advantage offerings.
Medicare Advantage vs Supplement Plans
Unlike Medicare Advantage plans, Medicare supplement plans improve Medicare coverage over what is offered by Traditional Medicare alone. With a Medicare supplement plan you keep the two most important benefits of Original Medicare. You can see any doctor and visit any medical facility in the US or its territories as long as the accept Original Medicare. Plus there is no insurance company between you and your doctor. Your healthcare decisions are between you and your doctor with interference from a private insurer.
Medicare supplement plans (aka Medigap plan) pay the deductibles, copays and coinsurance left as your responsibility with Medicare part A & B. With a Medigap plan, your out-of-pocket expenses for Medicare bills can be as low as just a few hundred dollars a year. You have 100% hospital insurance coverage as an inpatient with a Medicare supplement plan.
Simply put, you have none of the disadvantages of Medicare Advantage when you decide to keep your Traditional Medicare and add a supplement.
Can I switch from a Medicare Advantage Plan Back to Original Medicare?
Yes. Medicare Advantage enrollees have the opportunity to go back to Original Medicare during the Annual enrollment Period (October 15 through December 07) and during the annual Medicare Advantage Open Enrollment Period from January 01 through March 31.
You can also move back to Original Medicare if you have a Special enrollment Period like when you move out of your service area or if your Advantage Plan stops services in your area.