What are my Medicare choices?
Medicare is an extremely complicated program, and the complications start right from the enrollment qualifications. For example, normally, when you reach 65, you go on Social Security, and you enroll in Medicare. However, some people qualify for Social Security early, and as a result of that they may qualify for Medicare early as well.
But that’s just an example of the complications. You can take this to the bank. Medicare is totally different than any other insurance you’ve ever shopped for.
- No other insurance comes in five parts, of which you have to have at least three, and then you can only have one of the other two, but you don’t have to take either of them.
- No other insurance requires you usually to carry two cards, and sometimes three, but for some people, only one.
- No other insurance is legally required, and you are enrolled automatically.
- No other insurance is going to be yours for the rest of your life.
And so, it should be obvious that you need to look at this a little differently. There are so many considerations that make Medicare different from any other insurance you’ve ever had that I simply will not have time to go over them all here.That would be enough material for a book.
Actually, in reality, I will eventually cover as much as I possibly can, but I will do that in multiple blogs. But regarding the topic of Medigap vs. Medicare Advantage specifically, there are a couple of important considerations that you should know, and it is best that you are aware of them when you are first entering Medicare, because later down the road, one of the decisions you make early on may be very difficult to change later as a practical matter.
Medigap or Medicare Advantage? Or neither?
Let’s start with identification. Just above, I told you that Medicare comes in five parts, and the three of them are required. The three that are required are part A which is paid for by the government, and you are enrolled in it automatically, part B which were also enrolled in automatically, but it can be deferred, and you pay a premium, and part D, which you are not enrolled in automatically, you pay a premium, and you must choose a plan or be penalized. See, it’s crazy already, and we are just getting started.
It gets even crazier, there are two more parts, which are optional, and these are the ones I’m going to discuss today, Medicare Advantage and Medicare supplements. If you don’t mind, I would like to simplify all this craziness just a bit. I will start by sharing a few facts with you.
Important fact number one. Neither one of these last two are mandatory, and both cost money, so if you are shopping based exclusively on monthly cost, you would probably leave both out. This might end up being a very big mistake, so let me explain that.
Although it’s not specifically accurate, people generalize Medicare into covering approximately 80% of your bills. Incidentally, this is called cost sharing, where you pay part, and the insurer pays part. In this case, the insurer is the federal government, and their cost share is roughly 80%, your cost share is roughly 20%.
This is important, because percentages work differently than flat dollar amounts. A percentage of a small number is going to be a small number, and a percentage of a big number is going to be a big number.
Now comes important fact number two. There is no upper limit in Original Medicare for this percentage. It doesn’t matter how many thousands of dollars this percentage ends up being, under Original Medicare it is still your responsibility.
I just recently read that a couple that retired in 2017 and stayed on Original Medicare will spend on average $275,ooo on health care throughout the remainder of their lives. $275,000. Please understand, that’s with Original Medicare paying 80% of the bill, their 20% cost share as a couple will average out at about $275,000.
I know that’s a little difficult to digest, so I am going to share the article with you, so you can see for yourself. This one came from CNN Money.
If that’s not shocking enough, it gets worse. That number is a 6% increase over the year before. Don’t you wish Social Security went up 6% a year? This is exactly why a person making the decision to keep original Medicare only based on monthly cost could be making a very big mistake.
Here is another article I wanted to share with you. This was shared on the CNBC website, and it gives you a clearer picture of what exactly Original Medicare covers.
The simple truth is that Original Medicare is just not enough.
How can I protect myself from the Original Medicare unlimited percentage?
Good question, so let’s talk about insurance fundamentals. With all insurance, a little investment now could pay off big later. We all know that it is the nature of insurance that it may not pay off at all, but in the case of health insurance, if it does pay off, it will pay off big because of the high costs of health care.
From the perspective of investment, life insurance is the only sure bet in our industry. But let’s talk realistically here, health insurance for seniors, otherwise known as Medicare, is very close to a sure bet. As we get older, health issues become more and more common, and usually more and more serious.
So getting back to that 20% exposure in your cost share, both Medigap, which is a term commonly used for Medicare supplements, and Medicare Advantage protect you from that 20%, and they do so in different ways.
Let’s start with Advantage Plans
Medicare Advantage protects you from this exposure, usually with a very low premium, because it places a cap on the total amount you can possibly pay. Once you hit that dollar figure, called the maximum out-of-pocket, the insurance company pays the rest, no matter how high it goes. In the insurance industry, we refer to this cap as MOOP. (Duh) So your expenses are stop-loss at some point, very cool!
But before you grab your pen and sign up, you need to know that the dollar figure that represents your maximum out-of-pocket might just be a little daunting. In 2017, this number was allowed by the federal government to be as high as $6,700.
Of course, most plans use the maximum allowable MOOP, but you may find plans that use lower dollar figures. Rest assured that they’re getting their money from somewhere, probably in monthly premium or higher cost sharing. In other words, be careful. So, maybe this Advantage thing is not as cool as it seems…but hey, at least there is a limit.
Yes, but lets drill down a little deeper. Medicare Advantage, just like Original Medicare, is a fee-for-service plan. That’s pretty obvious, if you use a service, you pay a fee, but here is why that is important.
When you first become a part of Medicare, it’s most likely that your health issues will be minimal. This is the time period where your Medicare Advantage plan will really pay off for you. You may have some minimal expenses, meaning that you may need a few services, and so therefore, your expenses will be a small coinsurance, or more frequently a co-pay. But overall, your medical expenses, meaning the total of your fees, will be small and very manageable, and you are paying that low premium. Cool, this is working out great!
But here comes important fact number three. A disproportionate share of the medical expenses that Medicare pays out occur during the beneficiaries last year of life. Depending on when the beneficiary gets sick, this “last year of life” may just stretch across two calendar years, and in come cases, longer. Yes, I know that is more then a calendar year, but our health issues do not work on a calendar basis.
Stated more directly, it’s very possible that you can reach this maximum out-of-pocket for two years in a row. Or three. Or more. Because it’s a fee for service plan, when services become more frequently needed, and more expensive, your fees for these services will begin to become a big factor.
I wish I were wrong about that, but this is the story the statistics have told us. Sooner or later it is very likely that you’re going to be facing large bills, for emergency room visits and for extended hospital stays, not to mention the treatments required for whatever is going wrong. If you’ve chosen a Medicare Advantage plan, your part of these bills may approach or exceed the maximum out-of-pocket level of $6,700.
Now in the bigger picture, this is still a fraction, something less than 20%, of what the actual bills are. So let’s start by being thankful we are not facing the real cost. But having said that, it still has no relationship to what might be in your wallet. Your share will still be some percentage of your net worth, and many people find this to be a problem.
Download this guide for a quick overview of Medicare Advantage plans, published by the Department of Health and Human Services.
Medigap in action
On the other hand, Medigap is not fee for service, its actually fee insurance. It is essentially insurance against the fees of Original Medicare. That’s why I like to think of Medicare Supplements as financial insurance.
Medigap plans cover your financial responsibility (the fees) that occur as a result of medical issues that Medicare has covered. The medical issue does not matter, it could be an infected finger or open heart surgery, if Medicare covers it, then Medigap will pick up your share, It’s not the medical condition that is insured, its the fees.
So…as we said, Medicare will usually cover 80%, which would leave 20% on average as your responsibility. If Medigap pays for your 20%, this will frequently leave you with a bill of zero! Let me share with you a little of my professional experience. This is where the rubber meets the road, a real actual case study.
One year during open enrollment, I am not allowed to say when, I had a gentleman walk into my office and I figured he was in his mid 50s. Turns out he was into his early 70s, but he actually looked very young for his age. He also seemed to be in pretty good health and he surprised me by telling me he was there to inquire about Medicare. Specifically, he wanted to know about Medicare supplement plans. He looked so young that I was surprised that he was on Medicare, which is of course a requirement for Medigap.
In the course of our conversation, I discovered that this gentleman already had a Medicare supplement plan and he was interested in checking into a better plan. Unfortunately, I was unable to sell him a better plan, and the reason is because of medical underwriting which I am about to get to. But the reason why he was so interested in a better Medicare supplement plan is because he loved the one he had. And the reason why he loved his is the point of this story.
This gentleman had recently undergone open-heart surgery. Now I don’t know much about the actual cost of open-heart surgery, but I do know it’s very expensive. But even with knowing that, it strikes me that this gentleman must have had complications with the surgery, because he told me that the total cost of his surgery ran just a little north of $1 million dollars.
I’ll get back to this million dollar bill in just a second, but first, let me explain why I couldn’t sell this guy a better plan. For those that do not know, underwriting is the process of an insurance company approving an application, and this approval is based mostly on medical criteria. So I had to tell this guy that his open heart surgery would very likely (certainly) cause a denial of his application when it was underwritten.
There was a happy ending, though, I also told him that since he already had a Medigap plan, it could not be taken away unless he missed his premium payments, and that his plan would continue to protect him just as well as it already had, so he would be fine.
So now let’s get back to that million dollar total bill. Trust me when I tell you, this gentleman was not shopping, he knew exactly what he wanted. He wanted a new Medicare supplement plan that was even more comprehensive than the one that he had because he knew how well Medicare supplements work. After Medicare had picked up its share of his expenses, what was left over was probably, Im guessing, approximately 20%, or in this case around $200,000. This gentleman was thrilled with his Medicare supplement plan because it picked up all of that. His final bill out of pocket for a one million dollar surgery turned out to be zero.
Now if this interests you, here is more information. This one was published by the Centers for Medicare and Medicaid services.
And I am going to recommend that you visit our website, and get started on a plan.
Gaming the system
Sooooo…..I know what you’re thinking, because everybody has the same idea. Why don’t you just get the cheaper Medicare Advantage plan first, while the bills are low, and then later when the bills start going up, enroll in a Medigap plan. Simple and brilliant.
Not so much. OK, I mean it really is a great idea, but here is the issue. As I mentioned above, Medigap plans are underwritten, which means you have to get them when your health is fairly good. If you apply when you have health issues, like this guy who had had heart surgery, you are likely to be turned down.
This puts you in the position of figuring out when you might begin having issues, which is very precarious. Admittedly, there are people whose medical expenses do not rise significantly later in life, but I think we all know that these lucky individuals are the exception rather than the rule. Also, think about this. I get it that you are trying to save money by putting off the larger premiums until later, but really…do you expect to have significantly more money later in life?
Hey, it just might work out for you, and if you decide to try it, I sincerely hope it does. I’m just speaking here as one human being to another, and I really don’t want to see anybody in a bad position. But if I were to speak to you from the standpoint of an insurance professional, the insurance business is about risk, and I sincerely believe this is a pretty big risk to take.
Here is the way I explain it to my clients. It’s not hard to see that the deciding factor is the fees for the services, or looked at another way, your projected health. When your health is basically good, you will have fewer fees, and an Advantage plan will work better, because it’s decent coverage at a low price. However, if your health is problematic, a supplement plan would be more appropriate, because you will have more and larger fees, and they would be covered with a Medigap plan.
So if your health is poor going in, it’s a no-brainer, get the Medigap, and be covered. You will have a guaranteed issue period when you first get part B, as long as you are at least 65. But if your health is good going in, you have to predict your health outlook going forward, and that’s just not possible. You are not totally clueless, you can learn some things from family history, and your own personal history as well, but best case, it’s only guesswork.
So instead of guessing, let’s work with facts we do know. Fact number one, we are shopping for health insurance after all, so doesn’t it kind of miss the point to choose health insurance that protects you best when your health is good? Fact number two, the higher premium of Medigap represents an investment, so lets honestly evaluate the investment.
When we take into account the fact that there will be limited availability for Medigap when it is most necessary, due to underwriting, and also look at the statistical near-certainty of having higher medical expenses eventually, for me it’s pretty obvious. All things considered, this is an investment that will pay off. It is the insurance option that I recommend.
That is my professional opinion, but it is not the full picture, and I want to make sure you can make a fully informed decision here. In some cases, the higher Medigap premium is just simply prohibitive, and Medicare Advantage is a good choice, there is nothing wrong with it. Original Medicare alone might not be such a great choice, but it is the most cost effective, unless you get sick. I want to leave you with a booklet we keep in the Better Insurance Options Reference Library, to help you make this choice a little easier. This one is published by the Medicare Rights Center, which is sort of an expert site for agents, but it’s worth looking at.
It’s a difficult decision, there are many factors to consider, but let’s step out of all the analytics for just a second and look at it from an emotional standpoint. When you have Medigap, you are covered, end of story. And that equals peace of mind.
And just one more thing. All of this downloadable information comes from our Better Insurance Options Reference Library, which we maintain and update to assist our clients in the best possible way, with the most accurate information. It’s the way we do things here. and we would love to help you even more. Either way, thought, I hope this has been helpful.
Frank Sutter, Licensed Independent Insurance Professional, PA, AR
2119 Cemetery Avenue Philadelphia, PA, 19142
O: 215.992.9953 | C: 267.997.1007
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