Three Reasons Medicare Advantage Can Be Called Medicare Dis-Advantage

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MedicareOnly a quarter of all Medicare participants have opted to use the private Medicare Advantage (MA) insurance option, and this number is expected to drop drastically over the next four years.

As mentioned in an earlier column, the primary reason many choose MA is to minimize their monthly premiums. However, this monthly premium advantage could quickly become a disadvantage in several different scenarios.

The principal reason to avoid MA is because your options become limited to a predefined private health care network. Seeking care outside of this network will quickly lead to escalating financial woe.

The limitations of this network expand beyond asking your primary care physician if he or she participates. Consider that one day you may need a heart transplant or are stricken with a rare form of cancer. You can bet that the Johns Hopkins Hospital has never heard of your local insurance network.

A second disadvantage of MA exists for those who spend long periods away from home. MA plans are required to cover emergency services, so there’s no reason to avoid taking one more cruise, but all other nonemergency services will be charged at the out-of-network price. Some special policies allow snowbirds from the Northeast to remain in network when they winter in Florida, but this only applies to a limited set. If your vacation home is in Montana or the Cayman Islands, you should expect to pay a hefty price for physical therapy, doctor visits and your prescriptions.

A third larger problem faces MA participants. 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 subsidy beginning in 2014. And this is during a time when health care costs are expected to rise 3%, which means a 7% real reduction. By 2017, the Heritage Foundation estimates that many regions (MA subsidies are set by county) will receive as much as a 60% cut in their subsidy.

Much of these cuts were part of Obama’s Affordable Care Act (ACA). The Congressional Budget Office projects that the law’s payment cuts alone will result in three million fewer people enrolled in MA.

MA recipients should expect to see their monthly premiums rise to compensate for these cuts. As monthly premiums rise and extra benefits (like a gym membership and other preventive health measures) are cut back, seniors are more likely to switch their care to Original Medicare.

But some seniors will find themselves feeling trapped. 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 Original Medicare by covering the excess coinsurance payments among a number of costs that would typically be out of pocket. A $100,000 doctor service could leave an Original Medicare participant 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. But Medigap policies are allowed to jack up the premiums for those switching from MA with preexisting health conditions.

However, if your MA program shuts down and no longer offers insurance, you will be eligible for 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.

Those who live outside of these states and have an imperfect health record will be asked to pay significantly higher premiums. And with MA in the cross hairs of a political battle over the future of government funded healthcare, do you need any more reasons to opt for Original Medicare?

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Matthew Illian was a Wealth Manager at Marotta Wealth Management from 2007 to 2016. He specialized in small business consulting, college planning, and retirement plans.