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Managing Medicare's Costs

When and where a Medicare Advantage PPO plan is superior to a Medigap policy

If you are cost-conscious, retired, and don’t have an employer plan to supplement Medicare, a good Advantage PPO plan may be a better all-around deal than a Medigap policy. That’s true whether your principal objective is to save money or to get the best healthcare.

And with Medicare’s quality bonus payments to Advantage plans totaling $3 billion this year, preferred provider organization (PPO) plans have a financial incentive to improve their care. But Medigap insurers have no means of improving theirs other than by hoping Medicare will succeed in creating accountable care organizations.

Advantage PPO plans and Medigap policies share certain traits. Number one, you don’t need referrals to see specialists in either type of coverage. In a PPO plan, though, if you see an out-of-network doctor, you’ll pay more than if you’d remained in the plan’s network. Medigap plans don’t have networks, so if you want unlimited freedom to see doctors without having to worry about staying within a network, you’re better off with the Medigap policy.

You pay, however, for that extra degree of flexibility and for a Medigap policy’s overly comprehensive benefits. If you’re still in your 60s, you may fork over $80,000 in Medigap premiums over the next 20 years, and that amount does not include prescription drug coverage or Part B premiums.

Medigap policies’ steep price buys unlimited flexibility and benefits so ample that you may never make a co-payment. These policies are also pricy because they receive no tax breaks, subsidies or quality bonuses (unlike employer plans and Advantage plans).

The premium difference between Advantage PPO’s and Medigap plans can be striking. In Pittsburgh, for example, the UPMC for Life Advantage PPO plan has the area’s highest quality rating (4 stars) among PPO plans. For a 65-year-old, the UPMC plan has annual premiums that are $1,400 less than a Medigap Plan F policy.

Plan sponsor UPMC is a $10 billion healthcare enterprise that among other things runs one of the country’s 10 best-rated hospitals, according to the U.S. News & World Report rankings. It has 6,500 doctors in its Advantage PPO plan, which is a network large enough that most enrollees will not need to leave it to find a doctor. If you are reasonably good health and live in western Pennsylvania, you will save more than $1,000 a year and probably get better healthcare than if you have Plan F.

Urban centers like Pittsburgh are more prone to have Advantage PPO plans with large networks and solid quality than are less populated counties. Another example of a good plan in a metropolitan area is the HumanaChoice Advantage PPO plan in Seattle. It has 5,500 network doctors and a 3.5 star quality rating that puts it in a tie for the area’s best-ranked Advantage PPO plan. Premiums are $1,600 less a year than those of a Plan F.

Tucson, a smaller city, has several strong Advantage PPO plans. The Humana Readers Digest Advantage PPO plan is tied for top spot in the area’s best PPO quality rankings, and it has a provider network of 2,000 physicians – still a good number for an area that has a population only one-fourth as large as Seattle’s. If you happen to be a 65-year-old senior in the Tucson area, your annual healthcare premiums will be about $1,000 lower in the Humana plan than if you buy Plan F.

The well-rated Pittsburgh, Tucson, and Seattle plans are all local PPO’s. The other type of Advantage PPO is the regional plan, which covers one or more states. The regional PPO’s were introduced in 2006, but they have not been as effective as the older local PPO’s.

Besides their lower premiums, Advantage plans have out-of-pocket limits that protect against catastrophic loss, whereas Medigap policies do not (except for the infrequently sold Plans K and L). Nor are two types of coverage exactly comparable in other ways. Three Medigap plans have some benefits for medical emergencies when you’re traveling in another country, but almost no Advantage plans do. But most Advantage plans have benefits for routine dental and vision care, which Medigap policies do not.

The tradeoffs then are that Advantage PPO plans usually have much lower premiums, some cost-sharing, and fairly good catastrophic protection. Medigap policies have little or no cost-sharing for Medicare-covered services and no out-of-pocket limits. The benefit designs of Medigap policies are so good that their absence of out-of-pocket limits is rarely a problem. It affects only those people who stay in a skilled nursing facility for more than 100 days or who are hospitalized for more than a year during a benefit period. People in reasonably good health will save money in an Advantage PPO plan, but someone with health problems is probably better off with a Medigap policy.

What about quality of care? Here the edge goes to the Advantage PPO, which is able to coordinate its care. While PPO’s are still ironing out the best ways to accomplish this coordination, they are motivated by the extra millions they will receive if they are successful. All Advantage PPO plans now require primary care physicians to administer recommended tests and treatments, and the plans follow-up by monitoring doctors’ performance on these measures. Five years ago the better PPO’s did this, but some were less attentive to their doctors’ performance. Today doctors who consistently fail to meet standards are removed from the network.

Because PPO plan members don’t need referrals to see specialists, plans must determine the best way to keep primary care physicians in the loop. If a specialist is in the plan’s network, plan rules require him or her to give clinical feedback to the primary care doctor. And if the specialists are not in the plans’ networks, the plans can ask them, as a condition of payment, to send test results and recommendations to the primary care physician.

So far there have been encouraging results. Quality scores for local PPO’s, which account for two-third of Advantage PPO enrollment, have improved. The local plans are usually older and have better quality controls than their regional counterparts. In the last year, local PPO’s have also had the largest percentage enrollment growth –64%— of any type of Advantage plan.

According to the Medicare Payment Advisory Commission’s 2012 Status Report on the Advantage program, the next largest percentage increase was for regional PPO’s. Both types of plans benefited from the closing of most Advantage Private Fee-for-Service (PFFS) plans over the last two years, a period when PFFS enrollment dropped by almost one and one-half million people.

Even while enrollment has increased, regional PPO’s have not improved their quality scores. And despite Medicare’s incentives for these plans, they have struggled financially. Anthem Blue Cross discontinued its two regional Advantage PPO plans in 2012, which relied on doctors in the Blue Cross Prudent Buyer network. That left more than 110,000 people who had to find new coverage in 2012.

In rural areas, people often have few viable options. They cannot afford to buy a Medigap policy and there are no Advantage plans that will enable them to continue to see their current physicians without consistently paying higher out-of-network charges. PPO’s work best when enrollees stay within the network except perhaps for an occasional appointment with a non-network provider. When a non-network doctor orders additional tests, then those costs are also likely subject to higher co-pays.

Because most insurers adjust their Medigap premiums according to age, the price discrepancy with Advantage plan premiums continually widens. For older retirees, there’s sometimes a $2,000 annual gap between the PPO plan’s and the Medigap policy’s premiums. Yet as they age most people’s use of medical services and their cost-sharing also grows, making a Medigap policy more desirable, particularly when a PPO plan’s network is limited. But for younger and healthier retirees, a good PPO plan can be a hard thing to beat. ◊◊

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