The Perks and Pitfalls of Medicare Choices

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. The decision about whether to choose Medicare Advantage or traditional Medicare can be surprisingly impactful. Joining me to shed some light on this issue is Mark Miller. He's a Morningstar contributor.

Mark, thank you so much for being here.

Mark Miller: Great to be here.

Benz: Mark, let's talk about the basic differences between Medicare Advantage or traditional Medicare. I hit a fork in the road when I'm Medicare-eligible. What are the major differences between the two plans?

Miller: Yeah, and this is really Decision One that people need to think about and everything kind of proceeds down to the different parts of the decision tree from that decision. A traditional Medicare is the program we've had since the mid-60s. It's fee-for-service Medicare. You can see just about any healthcare provider you want to. When you enroll, you're enrolled in Part A, which covers hospitalization; Part B, which is outpatient services; usually a Part D drug plan; and some kind of supplemental coverage is definitely recommended because Medicare doesn't have built-in caps on out-of-pocket, and so people usually do that with a Medigap plan. Some people get that coverage through a former employer or a union, let's say. Some people get that protection from Medicaid if they're low income. That's the traditional program.

A Medicare Advantage is a relatively newer phenomenon. It really got going around 2006. And it's a privately offered--commercially offered--managed-care alternative to the traditional program. So, you continue to pay your Part B premium. But instead of using that to present at just about any doctor, you elect to join a Medicare Advantage plan offered by an insurance company. It's managed care. It's generally an HMO, sometimes PPO. So, those are structures most working people are familiar with these days. In that sense, it's not that much different. It's all-in-one coverage. You generally don't sign up for stand-alone Part D coverage, although sometimes people do. It depends on the plan you join. Many have drug coverage rolled right in. And you don't get supplemental coverage because Advantage plans do have their own cap on out-of-pocket built in. It's a relatively high out-of-pocket. It averages about $5,000 a year.

In return for accepting the network limitations, which are typical HMO limitations ...

Benz: That you can't see every doctor that you want.

Miller: You have to see in-network physicians. You can see how out-of-network people, but you're going to pay a bunch more. In return for that, you are also generally getting some extra services built in. Lots of Advantage plans come with gym memberships. Increasingly, they have some level of dental coverage--not necessarily very robust, but some level of dental--some level of vision and hearing coverage. And there's a whole suite of new supplemental nonmedical services that're just starting to be rolled in that are going to help people who, let's say, are homebound, so ...

Benz: Who need in-home care.

Miller: Interesting things that go on there. That's the two different choices.

Benz: So, you say "managed care," and that naturally makes me think that Medicare Advantage might be more cost-effective. What is, in fact, the cost differential typically?

Miller: So, let's say, you're just turning 65 and you're signing up for Medicare for the first time. And you look at Advantage and say, "Well, I can pay my Part B premium but not have to pay a separate Medigap premium, a separate Part D premium. You got all these other extra benefits rolled in."

Benz: Gym membership, yeah.

Miller: Gym, dental, which is really a big, big deal. That's another topic. There's so many topics on Medicare. We could go on all day with this. So, yeah, it looks very attractive. It may look cheaper to you.

The thing that a lot of times gets missed is this: That when you first sign up for Medicare, you have the opportunity to buy a Medigap plan with preexisting condition protections. Meaning that the insurance companies that offer Medigap can't turn you down for preexisting condition, can't charge you more for preexisting condition. And you can sign up with those protections from six months past the point that you sign up for Part B--that's your window for that protection, and then it's gone, with the exception of four states that have some level of guaranteed enrollment with preexisting condition on an ongoing basis. And those are on the east coast: They are Connecticut, New York, Massachusetts, and Maine has some more-limited protections. But everywhere else, if you don't choose traditional Medicare with a Medigap in that window, that preexisting condition protection is gone, which means that if at some later point you want to revert to traditional Medicare, you may well have a hard time getting a Medigap. That effectively makes it impossible to go back to traditional Medicare or, I would say, inadvisable, because you're going to have no protection for potentially large out-of-pocket costs. And so, this is the point I've been trying to hammer home with people.

What I think often happens is, the attractiveness of the cost savings and the extra benefits obscures a consideration of the long-range implications of the decision. So, you're 65, you're hopefully healthy, you're working out in the gym and all that. You're not necessarily thinking about what's going on when you're in your 80s, late 70s, and maybe have a serious condition that it's going to require--and you're going to want--more flexibility. Let me put it this way ...

Benz: Of providers and so forth.

Miller: Of providers. So, a story that I just wrote in The New York Times talks about one couple that did just this. The guy was attracted to all the extra benefits. Then eight years later ...

Benz: Of Advantage.

Miller: ...eight years later, receives a serious illness diagnosis, an aggressive form of cancer. As I would do, he's nosing around in his hometown to find out who is the person you want to see in Chicago, who is the expert on my condition. This is the natural reaction we would all have with a life-threatening illness. And guess what, that provider and the medical center are out of network. "Oh, well, so I'll just go back to traditional Medicare." But, you know, he's got this problem. So, he's pretty much stuck with Advantage now. He's been able to kind of navigate through it and get to the provider he wants to see.

But this is the thing that concerns me about Advantage is that it comes with some things that look attractive, but there really can be some serious ramifications from a care and provider standpoint down the road.

Benz: Another takeaway is people might have this sense that "I could do some switching," but it isn't that easily navigated because of this preexisting condition situation.

Miller: Because of the Medigap problem. Yes, technically, you can move back in traditional Medicare, but can you get a Medigap?

Benz: So, how about health outcomes when you compare Medicare Advantage plans versus traditional Medicare? Do the data say anything about where people are better off?

Miller: I'd say it's inconclusive. There's a lot of research, a lot of serious academic research on it that is inconclusive. Some of the research points to some better outcomes for Advantage patients than traditional in areas like preventive care, for example, which would stand a reason because that's a strength of managed-care approaches.

Benz: You're not going to feel any (inhibition) to go see a doctor because…

Miller: Yes. But there have also been some studies that point to very high rates of denial of care in Advantage, because it's in the insurance company's interest to keep their costs down, maximize profits. So, I think it's fair to say that there's not a consensus yet on that. I think you can get some healthy debate. The jury's out in some senses, but maybe that Advantage is doing better in some areas and not so well in others.

Benz: Mark, important topic. Thank you so much for being here to share this information.

Miller: Thanks so much for inviting me.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.