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Managing Medicare's Costs

Catastrophic protection and the various types of Medicare supplemental coverage

Medicare has limits on its coverage. But for Medicare’s beneficiaries, there are no limits on how much they can spend. And because Medicare does not have out-of-pocket (or OOP) limits, retirees should closely evaluate the catastrophic protection they get through their supplemental plans.

There are two ways to assess a plan’s catastrophic coverage. The first is to determine its true OOP maximum for medical costs, which is not necessarily the same as its stated OOP limit. A second and more time-consuming way is to go one-by-one through a plan’s individual benefits to see where they may fall short. For Medigap and other plans that have no OOP limits, the second way is the only way to know the size of the coverage gaps.

The first approach works with most employer supplements and Medicare Advantage plans. Except for regional PPO plans, all Advantage plans in 2011 are required to have OOP limits (or maximums). The maximum OOP for Advantage plans this year is $6,700, but one-half of the plans have a $3,400 limit, which is Medicare’s recommended amount. Plans’ OOP limits do not their premiums, if any. Thus a plan that has a $3,400 OOP annual limit and a $50 monthly premium for medical coverage has a true OOP maximum of $4,000 for Medicare-covered services.

In most Advantage plans, though, that limit does not include the costs of medical services provided by non-network doctors. Retirees with health problems, for instance, often see non-network specialists to get second opinions or to consider other treatment options. If these retirees are in Advantage HMO plans, when they go outside the network they will likely pay all of the costs, none of which will count toward OOP limits. Even if they are in Advantage PPO plans, they will face higher cost-sharing and higher OOP limits when they go outside the network. A local PPO plan, for example, may have an in-network limit and a second, larger limit (which cannot exceed $10,000) that includes non-network services.

When they first enroll in Advantage plans, retirees are typically in good health and not overly concerned about the plans’ catastrophic coverage. But as several studies have shown, they disenroll from these plans at high rates if they have serious health problems, in large part because they have trouble seeing the physicians they want to see or getting the treatments they believe that they need. And when they go outside the network, they not only pay more, but their payments may not count toward their plans’ OOP limits. For that reason, small-network Advantage plans are particularly risky choices.

The second way to assess a health insurance plan’s catastrophic protection is to go benefit-by-benefit through its coverage summary to find any large gaps. This is the only way to assess most Medigap policies, which do not have out-of-pocket limits (the exceptions are Plans K and L). Medigap plans are often analyzed and their benefit designs are shown in numerous publications, so they are fairly well understood by health insurance counselors. For the most part, Medigap plans have good-to-excellent catastrophic protection.

Still, a few plans have potentially substantial gaps. Plans A and B, for example, do not have any supplemental coverage for skilled nursing facility care. Medicare pays the entire cost for the first 20 days of a stay in a skilled nursing facility. For days 21-100, however, Medicare in 2011 requires a $141.50 daily co-payment. So, if someone with Medigap Plan A or Plan B stays in a skilled nursing facility for 100 days, they will owe $11,320 in co-payments (80 days times $141.50 a day). Medicare’s coverage ends with the 100th day.

Granted, it’s unlikely that someone will stay 100 days in a skilled nursing facility. Nationally, the average length of stay is about 25 days, but the average is misleading because the majority of stays are for fewer than five days. Still, a surprising percentage of stays are two months or longer, and there are enough of these these to bring the average up to 25 days. Medigap plans A & B, then, have a potentially large gap for skilled nursing facility care. The other coverage gaps for medical services in the various Medigap plans are much smaller.

Because most retirees live on modest incomes, even costs that fall well below plans’ catastrophic thresholds can be financially devastating. As well, medical catastrophes are often accompanied by unusually high prescription drug costs, which can not only double the financial impact but which are subject to a different set of catastrophic coverage rules. Even though a large portion of this financial hit is unavoidable, by using catastrophic protection as one selection criterion, retirees can make better choices and feel more secure in them.

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