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Medicare Advantage plans: health insurance with declining premiums

Last week the Department of Health and Human Services (HHS) said that Medicare Advantage plans will cut next year’s premiums by an average of four percent. It’s the second straight year in which Advantage plan premiums have dropped, and according to HHS, in 2012 they will be 11.5 percent lower than they were two years ago.

How in a time of rapidly rising healthcare costs can Advantage plans reduce premiums two years in a row? There’s no evidence that plans have slashed benefits – in fact, this year for the first time all plans are required to have out-of-pocket limits, with approximately one-half the plans using Medicare’s recommended amount of $3,400 or less.

The cuts would also be understandable if Advantage plan premiums are seen as being too expensive. But this year slightly more than one-half of the people who are in Advantage plans with prescription drug benefits pay no premiums for either medical or drug coverage. Or, if their enrollment was shrinking, Advantage plans might logically respond by trimming premiums to persuade people to remain in their plans. Yet Advantage plan enrollment is at record levels.

A recent Kaiser Family Foundation study of Advantage plan 2011 enrollment said that “the decline in enrollees’ average premium appears to reflect aggressive premium setting by firms seeking to retain enrollees and attract new ones.” The report pointed out that Advantage HMO plans are the ones most likely to have very low or zero premiums.

The strategy of keeping premiums very low has been a successful one. Worried about their healthcare costs and attracted by the low premiums, retirees are expected to continue to migrate to Advantage plans, at least in the near term. And low premiums are among the first criteria they use to choose affordable coverage. Advantage plan enrollment has already more than doubled in the past five years, and in last week’s press release, HHS said that enrollment (currently 11.9 million) is expected to grow 10 percent next year.

One reason that plans can keep premiums low is that in some cases they redesign their benefits each year in order to reduce premiums or to keep them at zero. Some plans may, for instance, shift certain costs to retirees by increasing co-payments and co-insurance requirements.

These often subtle changes in cost-sharing increase retirees’ risk. When people in Advantage plans have health problems, they are likely to pay much more than they would in a plan with higher premiums and lower cost-sharing. Still, if a plan uses Medicare’s recommended $3,400 out-of-pocket limit, people are fairly well insulated from excessive cost-sharing. Protected by this safety net, healthy retirees who believe they will use few medical services are often willing to accept the risk in return for low or zero premiums.

Another reason that Advantage plans are able to keep premiums low is that they receive government subsidies – payments that are in excess of what Medicare would expect to pay for those same patients. This year those subsidies are about 10%. Plans use the subsidies to reduce premiums and provide extra benefits, both of which will attract more enrollees.

A third reason is that Advantage plans enroll people who are healthier than the overall Medical population. Because they may lose money on people who have health problems, plans design benefit packages that are unattractive to people with serious illnesses and chronic diseases. Thus Advantage plans often have coverage that’s no better than Medicare’s for expensive treatments like dialysis and chemotherapy. And as they seek to control costs, managed care plans of all types (not just Advantage plans) can make it difficult to get second opinions, referrals to certain specialists, and expensive treatments. These restrictions cause unhealthy people to disenroll from Advantage plans at much higher rates than do healthy individuals.

Another way that Advantage plans maintain low premiums is by tightly controlling costs. Unlike fee-for-service Medicare, Advantage plans lose very little to waste and fraud. And as it turns out, Advantage plans benefit from Medicare’s cost-ineffectiveness, since the payments that the plans receive are based on the inflated amounts Medicare would expect to pay for those same beneficiaries, which includes money lost to fraud.

There’s no way to know precisely how much Medicare loses each year to fraud. The most commonly cited estimate, from the Department of Justice, is $60 billion a year, which is almost 15% of the $409 billion that fee-for-service Medicare spent in 2010. Using this estimate, then, Medicare’s payments to Advantage plans include the 15% that Medicare loses each year to fraud, even though Advantage plans will lose little or nothing to fraud.

After listing the reasons that Advantage plans may have been able to keep premiums low, it’s nonetheless surprising that so many of these plans can continue to do so year after year. In part this may be a result of the rich government subsidies. According to a Kaiser Family Foundation fact sheet, there were 247 Advantage plans in 2005. Today there are more than 2,000 plans, a result of changes in the law that created new types of Advantage plans and that provided them with subsidies. Under current law the subsidies will be phased out over a period of years and will be replaced by bonus payments to the plans that receive higher quality ratings.

Viewed solely from a cost perspective, Advantage plans are superior to Medigap policies. Advantage plans do not adjust premiums for age, unlike most Medigap policies, and so older retirees do not pay higher premiums. A recent Los Angeles Times article included a question from an 84-year-old retiree whose monthly Medigap premiums had jumped from $262 to $363. After monthly living expenses, he had only $240 left. “What can I do in the event of another premium increase?” he asked.

The responses given by the experts quoted in the article did not answer his question, possibly because there may not be a good answer. But he should at least shop around and see if a company such as United Healthcare, which uses a modified community rating, might sell him a Medigap policy at a lower premium than $363 a month. Or, he might switch to a lower-premium Medigap plan with slightly reduced benefits.

If his premiums increase again and he cannot afford them or switch to a different insurer or a lower-level Medigap plan, he will likely need to enroll in an Advantage plan (perhaps changing one or more of his physicians). Meanwhile, he is spending a high percentage of his monthly income on the most expensive coverage available.

A 65-year-old retiree in good health who enrolled in an Advantage plan instead of buying a comprehensive Medigap policy in 2006 would likely have saved about $10,000 over the past five years. If the retiree took several prescription drugs, the savings could be greater, since many plans use a portion of their subsidies to lower drug co-payments. There are, of course, bad as well as good Advantage plans, but people willing to do their homework before choosing a plan can save substantial amounts if they are willing to accept some restrictions.

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