About the New Medicare Plans

January 1, 2007 through through March 31, 2007 is the open enrollment for Medicare Advantage plans. These new private-sector plans were created along with the Medicare prescription drug program by the 2005 Medicare Modernization Act. During open enrollment, seniors already on an Advantage plan can switch to another company’s plan, or seniors can switch from traditional Medicare to Advantage or from Advantage back to traditional Medicare.

Over 300 private insurance companies provide Advantage plans funded by Medicare but designed and administered by private companies. They look less like traditional Medicare coverage and more like modern group insurance. Most of these plans also incorporate the new Medicare prescription drug plan into the coverage.

The question for seniors is which plans are better — traditional Medicare or Medicare Advantage? And should a senior on traditional Medicare sign up for a new Advantage plan under open enrollment or go back to traditional Medicare?

Medicare Part A was modeled after traditional hospital insurance plans available in the 1960s. A defined amount of hospital care was provided upfront after an affordable deductible. Any additional care would have to be paid for by the patient. Such plans are easy to design and costs are easy to control since Medicare has a predetermined benefit it will pay. Any costs beyond the predetermined amount are covered by the insured.

One disadvantage to this old design is that increasing hospital medical costs since 1965 have resulted in a dilemma for the insureds. Because of incredibly high room rates, any costs borne by the insured beyond the initial covered hospital stay could be so expensive as to destroy financially the unlucky patient requiring more care. As a result, modern hospital plans, including the new Medicare advantage plans, are designed around catastrophic coverage where the insured covers some of the cost upfront but is spared from financial disaster. Catastrophic insurance will pick up 100% of the cost after a certain out-of-pocket limit is reached. Unfortunately, the Medicare hospital coverage has stayed the same and has not evolved into a modern catastrophic plan.

In order to cover this gap in coverage as well as other out-of-pocket costs in traditional Medicare, private insurance companies in the 1970s began offering Medicare supplement or Medigap insurance policies. For an additional out-of-pocket cost, most or all gaps in traditional Medicare could be covered. But this supplemental coverage is expensive, costing anywhere from $100 a month to $250 a month in premiums depending on whether some gaps are covered or Medicare health-care is provided at 100% with no additional out-of-pocket costs.

Congress’ intent in introducing new Advantage plans was to modernize Medicare coverage and make it look like existing catastrophic plans but at the same time provide lower out-of-pocket cost for traditional Medicare beneficiaries who are buying Medicare supplement policies. The Advantage plan, for a lower premium or perhaps no premium at all, would replace the more expensive combination of traditional Medicare and supplement plans.

There are three issues to consider when deciding whether to switch plans from traditional to Advantage or vice versa.

The first is the issue of premium costs. Initial premiums for Advantage plans are considerably less costly for seniors than buying a Medicare supplement with traditional Medicare. However, the trade-off is that the insured must pay more out-of-pocket upfront for services than with traditional Medicare and the supplement. This may be an acceptable trade-off for many seniors, but what if Advantage insurance carriers cannot make the premium costs work? In other words what if the advantage company has to raise premiums year-over-year to avoid losing money?

This is essentially what happened to Medicare+ plans that were designed on the same concept 10 years ago. Over the years, HMOs that provided Medicare+ did not find it cost effective. Many of them simply opted out of providing the plans and their clients had to go back to traditional Medicare. Congress has subsidized the new plans by giving them about $100 billion to get started. What happens when the subsidies are gone?  The new plans will also allow companies to increase premiums. But what if those premiums get so expensive that seniors find it more cost effective to go back to original Medicare? We don’t know the answer yet because these plans are still too new.

The second issue has to do with how well claims are paid by advantage companies. The company decides which claims it pays, not Medicare. Again, we don’t yet have enough experience to know whether private insurance companies are paying claims adequately or creating a hassle for their insured clients. There is some evidence that nursing home coverage and home health-care coverage under the new plans is being severely restricted or even denied over the same coverage that would be provided under traditional Medicare. Overall, it’s too early to tell about the claims issue.

The third issue has to do with the trade-off in costs. As a general rule of thumb, seniors who buy the advantage plans and who are relatively healthy will save a great deal of money over the years. They probably won’t have a lot of out-of-pocket costs for hospital stays and outpatient coverage.

Seniors who are not healthy are probably better off under traditional Medicare with the supplement insurance plan. This is because they are paying the costs of 100% coverage spread out, at a fixed cost, on a monthly basis through supplement premiums. This is contrasted with $1,500 to $3,000 one-time, out-of-pocket costs per year for receiving services through an Advantage plan. Some seniors just don’t have very large sums of money in their savings and prepaying care through monthly premiums for Medicare supplement is sort of like buying expensive health services on an installment plan.

Only time will tell whether Congress’ experiment with advantage plans is better than traditional Medicare or not.

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About Evan H Farr, CELA, CAP

Evan H. Farr is a 4-time Best-Selling author in the field of Elder Law and Estate Planning. In addition to being one of approximately 500 Certified Elder Law Attorneys in the Country, Evan is one of approximately 100 members of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys and is a Charter Member of the Academy of Special Needs Planners.

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