Navigating Medicare Open Enrollment for 2024

Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights. Citigroup’s third-quarter results surpassed Morningstar’s expectations. What Morningstar’s analyst wants investors to keep in mind about the stock. Plus, actively managed funds netted a rare reversal. What you can do to improve your odds of picking a winning active fund. And Social Security and Medicare have released their 2024 numbers. Retirement Reboot author Mark Miller will share a warning about choosing Medicare plans. This is Investing Insights.

Welcome to Investing Insights. I’m your host, Ivanna Hampton. Let’s get started with a look at the Morningstar headlines.

Citigroup Q3 Earnings Crushed Estimates

Citigroup’s third-quarter earnings beat Morningstar’s and Wall Street’s estimates. The big bank reported earnings of $1.63 per share. Fees and net interest income (or what a bank earns on loans) also topped expectations. Citigroup still isn’t making any changes to its full-year outlook. The bank seems likely to surpass its full-year revenue forecast of $78 to $79 billion. Its expenses have remained on track. Citigroup is outperforming when it comes to revenue growth. While the bank’s revenue plan is working so far, Citi will need to prove itself again next year. Morningstar predicts the upcoming 2024 expense outlook will be the next key update. Its analyst thinks Citigroup’s stock is worth $68 and undervalued. However, investors should keep in mind the bank is still working on its turnaround.

Strong Travel Demand Lifted Delta’s Q3 Earnings

Strong travel demand lifted Delta Air Lines’ third-quarter earnings. The domestic airline brought in nearly $2 billion in operating profit and paid down hundreds of millions of dollars in debt. However, this past summer’s spike in jet fuel prices hurt profitability a bit. Less volatile costs, like labor and maintenance, have risen for Delta and other airlines. Morningstar expects these increases to continue. Ticket prices will likely remain high. But this shouldn’t hurt demand over the next couple of years. However, higher ticket prices will eventually dampen it. More than half of Delta’s revenue during the first nine months of 2023 came from premium seats and offerings. Management says premium sales and bookings remain strong. However, Morningstar has seen early signs of price pressure for main-cabin ticket sales. Morningstar has lowered its estimate for what Delta’s stock is worth to $40 from $41.

Social Security and Medicare in 2024

Millions of people rely on Social Security benefits to help cover their expenses. The federal government has announced the 2024 Social Security cost-of-living adjustment. Meanwhile, Medicare open enrollment season is underway. I spoke with Morningstar contributor and Retirement Reboot author Mark Miller before Medicare announced its 2024 changes. The details are now out. The standard monthly Medicare Part B premium will increase by almost $10 to $174.70. The annual deductible for Medicare Part B will increase by $14 to $240. Here’s my conversation with Mark.

Ivanna Hampton: Thanks for your time today, Mark.

Mark Miller: My pleasure.

The New Social Security COLA

Hampton: So the new Social Security COLA is 3.2%. It’s less than the last couple of years. What’s your reaction?

Miller: I mean, it’s not a surprise. I think we’ve known for a while that it would be smaller because inflation is running at a lower pace than it was a year ago. The COLA is determined using an automatic formula that measures the pace of inflation going on in the third quarter of the year compared with the third quarter last year and compares the Consumer Price Index. We’ve known for a while that it would be, in fact, smaller. And a lot of people look at this, you see headlines about Social Security’s raise and this sort of thing or Social Security cutting the amount of the benefit. The COLA is an incredibly important benefit. It’s really a unique benefit when you look at retirement income. It’s really the only type of retirement income people get that is automatically adjusted for inflation. But it is not really, thinking of it as a raise is wrong. It’s an inflation adjustment aimed at keeping people even. And does it do that perfectly? No, but it does a pretty good job. And as I say, it’s the only program of its type that adjusts annually for inflation.

So inflation affects different people in different ways. For example, homeowners versus renters. Renters are more exposed to big increases in rental rates that we’ve seen lately. Most seniors are homeowners, but those who are renters may be exposed to bigger increases. Healthcare costs affect older people more to a greater extent than it does younger people. So there’s lots of interesting variations in the way that inflation affects individuals. But nonetheless, every year the Social Security benefit is adjusted, which is one of the reasons why I like to argue that one of the best strategies for protecting yourself against inflation is optimizing your Social Security benefit, meaning thinking carefully about when you’re going to claim your benefit along that time horizon of when you’re eligible with an eye toward getting the highest amount of monthly benefit, because then those COLAs get to be larger on a dollar basis.

2024 COLA and Retiree’s Budgets

Hampton: What does this year’s COLA mean for retiree budgets?

Miller: For the average beneficiary, it means an increase of about $50 per month. And the actual net of that we’ll know sometime soon when Medicare announces the increase, if any, in the Part B premium, because most people who are retired and on Medicare, their Part B premium is deducted from the Social Security check. So kind of what we got today is sort of the gross number. We’ll get the net number sometime in the next few weeks, I would guess.

Traditional Medicare vs. Medicare Advantage

Hampton: And you brought up Medicare. The open enrollment period is going to run from Oct. 15 to Dec. 7. Can you explain the difference between traditional Medicare and Medicare Advantage?

Miller: Right, so the things that you can do during open enrollment, this is the time of year when you can basically run a checkup on your coverage. You know, if you’re enrolled in Medicare, Part A and B with a Medigap, which would be a traditional Medicare enrollment, you don’t need to review that coverage. The things that need to be reviewed are Part D prescription drug coverage, if you have that paired with traditional Medicare, as many do, or if you’re enrolled in Medicare Advantage. And Medicare Advantage is a managed care alternative to traditional Medicare. Traditional Medicare is basically fee for service. You can go to see just about any healthcare provider in the country that accepts Medicare, and most do. In Medicare Advantage, it’s kind of an all-in-one solution provided by a commercial insurance company, that bunches together all the different types of coverage into one. A lot of people like that because it’s convenient and the upfront premium is lower. But the trade-off is that you’re in a managed care network and you generally speaking have to stick with providers in the network.

Very often Medicare Advantage programs have prescription drug coverage built in and you don’t use a Medigap with Medicare Advantage. Medigap is supplemental coverage that’s aimed to control your out-of-pocket costs in traditional Medicare. In Medicare Advantage, those plans come with an out-of-pocket cap, albeit they’re not low. I mean, they’re typically close to $5,000 a year. So during the open enrollment, one of the things you can do is switch back and forth between traditional Medicare and Medicare Advantage. The one caveat I would offer on that is that for people who are thinking about leaving Medicare Advantage to go into traditional Medicare, you want to be sure that you’ll be able to get a Medigap plan when you make that move because you don’t want to be unprotected from potentially high out-of-pocket costs in the traditional program. And Medigap has what’s called the guaranteed issue period when you first sign up for Medicare Part B. That is to say, these insurance companies that sell Medigap cannot turn you down due to a preexisting condition and they have to sell you the plan at the best prevailing rate. Once that guaranteed issue window is closed and you come back, say, a year or two later, you may be able to get a Medigap and you may not. So before you make that switch, you want to investigate whether insurers that sell Medigap where you live are going to offer you a plan and at what price. So that’s the one caveat I would offer on that.

And then beyond that, if you’re in traditional Medicare, you do want to take a look at your Part D prescription drug coverage to see if it still meets your needs. These plans change their so-called formularies from year to year, meaning what drugs are covered and under what terms, premiums change, the deductibles change. So everybody gets what’s called an annual notice of change. They should have already received this before the open enrollment starts. And that should play out what any important changes you need to know about in your coverage. And so it’s a good opportunity to just compare and see what’s available for the year ahead in Part D and whether you’d be better off sticking with what you have or switching.

Will the Fed Cut Prescription Drug Prices for Medicare Patients?

Hampton: All right. Important notes that you mentioned there. The federal government is also looking to cut prescription drug prices for Medicare patients. What’s the progress on that?

Miller: Right. So the Inflation Reduction Act that was passed into law last year has several really important changes that it makes to the Part D prescription drug program. One of the issues with Part D when it was created some 20 years ago is that it didn’t come with any built-in out-of-pocket cap. And so for people encountering very high drug needs, the cost could get very substantial in the thousands of dollars. And here we’re talking about people who are spending money on expensive drugs for conditions such as cancer, let’s say. So the Inflation Reduction Act does several things. One is, and this has been in the spotlight to a great extent, it empowers Medicare to begin negotiating drug prices with pharmaceutical companies. And that has started, that process has started and has received a lot of headlines. But it’s a process that’s going to play out over several years and we don’t really know what the outcome of that will be yet. There’s going to be litigation back and forth between the government and pharmaceutical companies and a variety of other factors that—so hopefully it will lead to some reduction in costs of expensive drugs.

But more immediately and in a more concrete way, there’s a change that kicks in starting next year, several changes actually that kick in starting next year that are very meaningful. So in 2024, the Inflation Reduction Act eliminates a requirement that Medicare enrollees pay 5% of the cost of drugs after their total costs exceed a certain amount. And that next year will be $7,750. So when you think about it, 5% of a very large drug tab really adds up. So this elimination of the Co-Insurance Provision—experts estimate that that’s going to effectively put a cap on out-of-pocket spending in Part D next year at about $3,300. So that’s a meaningful change again for people who encounter high costs. And then in 2025, a second phase of these controls kick in when an across-the-board $2,000 annual out-of-pocket cost cap will be imposed. These are changes that are, really significant and immediate, and then we’ll see what happens with the negotiations with drugmakers.

Hampton: Yeah, that’s something to definitely pay attention to. Thank you, Mark, for your time today.

Miller: Always a pleasure. Thanks so much for inviting me.

Actively Managed Funds vs. Passive Index Funds

Hampton: Actively managed funds pulled off a rare reversal. They edged out passive index funds during this year’s market rally. Morningstar Research Services’ Manager Research Analyst Ryan Jackson will explain how the surprise unfolded.

Ryan, thank you for joining me.

Ryan Jackson: Yeah, happy to be here.

Hampton: Actively managed funds and passive index funds sort of have this rivalry. Can you talk about active funds’ rebound in 2023?

Jackson: Yeah. So, we recently published the most recent edition of the Morningstar U.S. Active/Passive Barometer. And what this report does is basically seek to measure how well actively managed funds are doing relative to the average passive fund within their Morningstar Category. So, a lot of times you’ll see research comparing active funds to a benchmark index. What this does is compare it to actual passive funds, painting a more fair and realistic alternative.

And you hit the nail on the head. I mean, it was a really nice rebound for active funds over the 12 months through June of 2023. We saw 57% of active funds both survive and beat their average passive peer over that span. That’s the best success rate they’ve had in years. That’s the first time a success rate has exceeded 50% since the calendar-year 2020. And not only a really nice rebound, but a pretty balanced one. Sixteen of the 20 Morningstar Categories that we surveyed saw active success rates above 50%. Foreign and U.S. equity strategies both succeeded at a 57% rate, and active bond managers succeeded 55% of the time. So, certainly not concentrated in one pocket of the market. It was a really diversified and really strong bounceback for active funds.

What Drove the Active Fund Rebound?

Hampton: So, what drove this reversal for active funds?

Jackson: It was kind of a surprising one, right? Because conventional wisdom always says active funds tend to do better during down markets because they’re more flexible, tend to have a little bit more cash on hand. And by the same logic, they should lag during market rallies. What we’ve seen over the past 18 months or so is pretty much the direct opposite of that. Where in 2022, during the down market, active funds actually sunk further than the average passive fund. And then, here we are in 2023, as the market picks up a little bit, it’s active funds that actually made out better. When you look at, OK, why were active funds able to clear that passive hurdle more often? I think it’s the combination of active managers jumping a little bit higher with strong performance but also some troubles in the passive space lowering the bar a little bit that they had to clear.

So, first, I mean, you definitely need to give credit to active managers and how they handled the start of this year. In the U.S., we saw really strong stock-picking for those equity strategies. In the fixed-income space, those managers tend to take on a little bit more credit risk. That was something that hurt them in ‘22 and early on in 2023, definitely it was more boon than burden. At the same time, I think you can also acknowledge that there were some segments of the passive market that had some trouble. It’s not always just broadly diversified market-cap-weighted indexes that are passive funds. There are some strategic-beta strategies that didn’t do so well, like dividend funds, which were stars in ‘22 and really struggled early on in ‘23, some low-volatility strategies weren’t going to keep up as well when the market rallied, and then some thematic passive funds also didn’t hang in there quite as well. So, it was kind of a double-edged sword, but certainly one that took the scales in favor of active managers.

How Active Fund Managers Can Keep Up Outperformance

Hampton: How can active fund managers keep up this outperformance?

Jackson: It’s a great question. And I’m not here to rain on active management’s parade, but I do want to put it in a broader context and say, over the long term, it’s been really difficult for active funds to keep up. So, we mentioned over the past 12 months, 57% of active funds succeeded. If you extend that look-back window to 10 years, it goes down to about 25%. So, only about one in four active funds has succeeded over the past decade. As far as how they can keep it going, I don’t think there’s a clear blueprint out there. It’s easy for me to sit here and say, “Hey, active stock managers keep doing good stock-picking.” I don’t know if that’s necessarily sustainable. Certainly, for the fixed-income active managers, if we continue to see credit spreads narrow, that’s something that should continue to behoove them. But overall, I mean, there’s no clear thing. Maybe if you kind of like control the controllables, they could reduce their fees a little bit, something that would certainly help them boost their success rates. But overall, it’s been difficult for them to keep up with passive funds.

How to Choose a Winning Active Fund

Hampton: This data captured 12 months. What should investors look for to improve their odds of picking a winning active fund?

Jackson: I touched on it a little bit just now, and it’s that element of cost should be a first and foremost consideration for investors. That’s something that’s clearly spelled out when you’re comparing funds, but something that I think a lot of investors still manage to overlook. As part of this study, we broke down the active fund universe into quintiles based on how much they charge. What we found was that those active funds in the cheapest quintile succeeded at about a 31% rate over the past 10 years. If you were to look at the most expensive quintile, that number sinks to only 19%. So, investors, when you’re picking an active fund, can basically give yourself a little 12-percentage-point boost just by going with something cheaper. And that’s nothing to sneeze at.

And the other important thing I would say is, when you’re thinking about whether or not to go with an active fund and how to find a good one, it depends on what part of the market you’re looking at. The question of where to go active is a really important one. So, for example, U.S. large blend is a segment of the market that historically has been very unkind to active managers. Only 10% of them succeeded over the past 10 years. But if you were to look at something like U.S. real estate, we saw active funds succeed at a 53% clip over the same 10-year span. So, it’s not always a question of whether or not to go active but also a question of where to go active.

Hampton: Well, that’s some good information to note. Ryan, thank you for your time today.

Jackson: Yeah, thanks for having me.

Hampton: That wraps up this week’s episode. Subscribe to Morningstar’s YouTube channel to see new videos from our team. You can hear market trends and analyst insights from Morningstar on your Alexa devices. Say “Play Morningstar.” Thanks for checking out Investing Insights. I want to thank senior video producer Jake VanKersen and lead technical producer Scott Halver. I’m Ivanna Hampton, a senior multimedia editor here at Morningstar. Take care.

Read about topics from this episode.

Citigroup Earnings: Revenue Growth Is Working, but We Won’t Know About Expenses Until 2024

Delta Earnings: Higher Structural Costs Will Lead to New Equilibrium; Fair Value Down $1 to $40

I’m 65 and Still Working. Should I Enroll in Medicare?

Should You Delay Taking Social Security Benefits?

Social Security for Beginners, Part I

2024 Medicare Parts A & B Premiums and Deductibles

Actively Managed Funds Surprise in Market Rebound

Large-Growth Active Fund Managers Have Faced an Uphill Battle

When It Comes to Passive Bond ETFs, the Devil Is in the Details