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Mark Miller: Remaking Retirement

Medicare Out-of-Pocket Costs: How Do Enrollees Get Protection?

Congress could mitigate inequities with some sensible Medicare program reforms, says Morningstar contributor Mark Miller.

Medicare smooths out much of the variation in the healthcare expenses that seniors incur--but out-of-pocket costs can be high if you’re not careful.

Most Medicare enrollees blunt out-of-pocket risk one way or another. According to new research by the Kaiser Family Foundation, 39% were enrolled in Medicare Advantage plans in 2018; these managed-care commercial alternatives to Original Medicare have built-in caps on out-of-pocket outlays. The rest are enrolled in traditional Medicare, which does not have a built-in out-of-pocket cap. Most of these enrollees get out-of-pocket protection from Medigap, retiree coverage, or Medicaid.

But 10% of Medicare enrollees have no protection from this risk. They’re in traditional Medicare but have no supplemental coverage.

That is a worrisome finding. This year, an Original Medicare beneficiary without supplemental coverage is subject to a deductible of $1,484 for an inpatient hospitalization plus daily copayments for extended hospital and skilled nursing facility stays. There’s also a separate deductible of $203 plus 20% coinsurance for most physician and other outpatient services, including for drugs administered by physicians for cancer and other serious medical conditions.

Advantage plans, meanwhile, are required by law to cap annual out-of-pocket expenses: In 2020, the average cap was $4,925 for in-network services, according to Kaiser, while the cap for out-of-network services is much higher, at $8,828. In Original Medicare, the average out of pocket spending among traditional Medicare beneficiaries in 2018 was $6,150, according to unpublished Kaiser data. That figure includes premiums and out-of-pocket outlays for uncovered services (such as dental, vision, and hearing care).

But the Kaiser brief on out-of-pocket protection also points to another worrisome trend: an inequitable two-tier Medicare program divided by income, education, and race.

Original Medicare, paired with a Medigap plan, is the gold standard of Medicare coverage: You are covered anywhere in the United States and can visit any healthcare provider that accepts Medicare. Depending on which Medigap plan you select, most cost-sharing is covered. Kaiser finds that the people making this choice tend to be higher-income and better-educated.

Upfront premium costs are higher in Original Medicare plus Medigap plan scenario. Along with your Part B premium ($148.50 per month), you’ll pay a Medigap premium (averaging $150) and probably a Part D prescription drug premium (averaging $33 per month). That likely sets you back about $4,000 per year.

If you’re in Advantage, there’s no Medigap premium and there’s a good chance your prescription drug coverage is included with no extra premium. You simply pay the Part B premium.

But Advantage is a high cost-share managed care health plan, because the annual out-of-pocket risk is higher. In Advantage, you’re exposed to thousands of dollars in out-of-pocket costs if you get really sick.

Analyzing federal data for the demographic characteristics of enrollees, Kaiser finds that Original Medicare plus Medigap policyholders had higher incomes and education levels, and were in “excellent, very good, or good health.” Medicare Advantage enrollees had lower incomes and education levels. There also was a racial gap, with Black enrollees accounting for a higher share of Advantage enrollment.

“The Medigap option has become a luxury for people who can afford it,” says Tricia Neuman, director of the Medicare policy program at the Kaiser Family Foundation and a co-author of the brief. “It’s the luxury to say that you care about which doctor you’re going to see, or what medical center if you get a serious disease.”

Original Medicare beneficiaries who lack supplemental coverage are somewhere in the middle from a demographic perspective, Dr. Neuman says. “They don’t have income low enough to have Medicaid or the Medicare Savings Program [which helps low income beneficiaries pay premiums]. And they're not in the group of relatively high income people who have supplemental retiree health benefits.”

The Disadvantage in Advantage

Medicare Advantage enrollees typically encounter problems when serious illnesses occur. Kaiser reports that half of Advantage enrollees would face higher costs due to a hospital stay of five days or longer than they would in Original Medicare.

Serious illness is a common motive for leaving an Advantage plan, according to many Medicare advocates and counseling services. Prior authorization features are common, and federal investigators reported in 2018 that Advantage plans had a pattern of inappropriately denying patient claims. The Office of Inspector General at the Department of Health and Human Services found “widespread and persistent problems related to denials of care and payment in Medicare Advantage” plans.

Defenders of Advantage programs point to studies that conclude they are outperforming Original Medicare in areas like preventive care, hospital readmission rates, admissions to nursing homes, and mortality rates.

Gut Instinct Enrollment Decisions

Most people make initial Medicare enrollment decisions without careful analysis of all these factors, Dr. Neuman says. Instead, there’s a fair amount of “trust your gut” decision-making.

For example, why would someone enroll in Original Medicare but fail to buy supplemental protection? “It might be someone who just doesn’t see a reason to buy a Medigap policy because of the premium,” she says. “This person probably is relatively healthy at the point when she enrolls, so she doesn’t anticipate major expenses.”

That same thinking can drive a decision to enroll in Advantage: Perhaps there is less of a choice of healthcare providers but that doesn’t seem so important to a younger, relatively healthy person at the point of enrollment.

Simplicity also drives the Advantage choice, she says. “It can be much easier, because it’s one-stop shopping. Life is complicated, and so is health insurance--here, you get Part A, Part B, and drug coverage, and you don’t need to hunt around for a Medigap plan, which comes with its own complicated set of plan choices. Or, it might just be a decision based on the brand name of an insurance company you’ve used before and trust.”

That type of decision-making misses the importance of healthcare provider networks. And with prescription drug benefits most often built into Advantage plans, you’re also missing the benefit of selecting a drug benefit well-suited to your specific coverage needs.

The Need for Reform

Congress could mitigate these inequities with some sensible Medicare program reforms.

One idea would be a unified out-of-pocket cap for both Original Medicare and Advantage. That would remove or at least reduce the need for Medigap and other supplemental policies.

There’s no reason that the playing field should be so uneven between the two programs, unless policymakers want to admit out loud that they are trying to transform Medicare into a privatized managed-care system. Instead, the pro-Advantage arguments usually revolve around consumer choice and cost reductions. The evidence for both of those arguments are shaky at best.

Absent that reform, a good step would be to broaden the “guaranteed issue” rights for Medigap plan purchases.

During the six months after you sign up for Part B, Medicare’s “guaranteed issue” rules forbid Medigap plans from rejecting you, or charging a higher premium, because of any pre-existing conditions. But after that time, Medigap plans in most states are permitted to reject your application or charge higher premiums. Four states (Connecticut, Massachusetts, Maine, and New York) provide some level of guarantee to enroll at a later time with pre-existing condition protection.

Guaranteed issue protection should be available nationally, and throughout the time that you are enrolled in Medicare. If you pick an Advantage plan at the point of initial enrollment, you probably will not be able to get a Medigap plan later on if you decide to move into Original Medicare. That effectively makes the initial decision irrevocable.

Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to The New York Times and WealthManagement.com. He publishes a weekly newsletter on news and trends in the field at RetirementRevised. The views expressed in this column do not necessarily reflect the views of Morningstar.