Avoid Medicare Advantage

Medicare Advantage has disadvantages that make healthcare more expensive for seniors. Recent changes to the laws such as Obamacare are likely to raise costs. Most retirees are better off with regular Medicare.

Medicare Advantage (MA) is an option that replaces Original Medicare parts A (hospital care) and B (doctor visits) and often includes part D (Rx coverage) as well; it goes through a private operator, while the government runs part A, B and D.

The primary reason some choose MA is to minimize their monthly costs. It covers everything that Medicare covers, but the devil is in the details. This monthly premium advantage could quickly become a disadvantage in several different scenarios.

One reason you should avoid MA is because your options become limited to a predefined private health care network. Seeking care outside of this network quickly leads to escalating financial woe.

The limitations of this network go beyond asking your primary care physician if he or she participates. In life-threatening situations, a limited network can put you in a terrible predicament. If one day you need a heart transplant or are stricken with a rare form of cancer, you may be stuck paying out-of-network fees if you seek a doctor or treatment center with the most expertise. You can bet that the Johns Hopkins Hospital has never heard of your local insurance network.

A second disadvantage of MA is relevant if you spend long periods away from home. MA plans cover emergency services, so there’s no reason to avoid taking one cruise, but all other nonemergency services are charged at the out-of-network price.

Some special policies allow snowbirds from the Northeast to remain in network when they spend the winter in Florida and still get regular care, but this only applies to a limited set. If your vacation home is out-of-state, expect to pay a hefty price for physical therapy, doctor visits and prescriptions.

A third larger problem faces MA participants as Washington looks for ways to cut the budget. The government pays a hefty subsidy to private health insurers for each MA plan, and these subsidies are scheduled to be drastically reduced in the coming years. The largest insurer, UnitedHealth, expects a 4% drop in subsidies beginning in 2014 while healthcare costs are projected to rise 3%, according to the company. Much of these cuts were part of President Barack Obama’s Affordable Care Act (ACA).

MA recipients should expect to see their monthly premiums rise to compensate for these cuts. The Heritage Foundation estimates that by 2017, retirees in certain regions might see subsidies cut by as much as 45%. Ascension County, La., loses over $9,000 per enrollee, according to the think tank’s calculations.

As monthly premiums rise and extra benefits like a gym membership and other preventive health measures disappear, seniors are more likely to switch to regular Medicare. The Congressional Budget Office projects that the law’s payment cuts alone can result in over four million fewer people enrolled in MA by 2018. Currently, only a quarter of all Medicare participants opt for the Medicare Advantage option.

But some seniors might feel trapped in MA. Although MA participants can switch to original Medicare every year during the open enrollment period without underwriting or extra cost, the same cannot be said for supplemental Medigap plans.

Medigap policies supplement Medicare by covering the excess coinsurance payments among a number of costs that are typically paid out of pocket. A $100,000 doctor service could leave a Medicare participant, who doesn’t have a Medigap policy, with a $20,000 bill. Few retirees want to take this risk, and so they sign up for a privately managed Medigap policy. These private supplemental policies offer essential coverage for what might otherwise be a financially catastrophic illness.

If you switch from MA to original Medicare, Medigap policies are allowed to jack up the premiums if you have preexisting health conditions.

However, if your MA program shuts down and no longer offers insurance, you can get a Medigap policy without medical underwriting. Additionally, residents of New York and Connecticut have state laws that allow them to switch at any time without medical underwriting or extra cost.

If you live outside of these states and have an imperfect health record, you might have to pay significantly higher premiums for Medigap plans. And with MA in the cross hairs of a political battle over the future of government-funded healthcare, limited service networks and lack of nationwide care, it’s a no-brainer to go with original Medicare.

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Matthew Illian, CFP, AIF, is a wealth manager for Marotta Wealth Management Inc. He is based in Richmond, Va., providing fee-only financial planning and wealth management at www.emarotta.com and blogging at www.marottaonmoney.com.
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