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Medicare Advantage plans in a retirement planning portfolio (2 of 2)

It was just five years ago that Medicare Advantage plans were a risky kind of health insurance. Some plans had wide gaps in their coverage but didn’t have out-of-pocket limits to protect people who fell into them. Also, plans often didn’t cover the same services as did original Medicare (Part A and B). And even when they did cover those services, plans sometimes required higher co-insurance payments than Medicare did.

Occasionally people were surprised to learn that their plans had made misleading promises to get them to enroll, and that they were worse off in the Advantage plans they’d chosen than if they’d remained in original Medicare without supplemental coverage.

Criticism of the plans mounted. In 2007 the Medicare Rights Center, the country’s largest Medicare advocacy organization, released a report that was based on thousands of consumer calls to the Center’s hotline. It identified nine serious problems with Advantage plans.

The following year the Government Accountability Office published an analysis of Private Fee for Service (PFFS) plans, at the time the fastest growing segment of Advantage coverage. The GAO said that people did not understand the plans and were frequently exposed to greater financial risk than with other types of Advantage plans. The report went on to point out that PFFS plans had a dis-enrollment rate of 21% during the first four months of 2007, more than twice the rate for other types of Advantage plans. And a few months later the National Association of Insurance Commissioners stated in a white paper about Advantage plans that “there are problems that need to be addressed in order to properly protect the Medicare-eligible population.”

A flurry of regulations in the next few years pretty much fixed those problems. Advantage plans are now required to have out-of-pocket limits, and the Kaiser Family Foundation reports in its 2013 Data Spotlight that almost one-half (48%) of the 2013 plans have out-of-pocket limits of $3,400 or less (Medicare’s recommended amount). Plans must cover the same services as original Medicare, with the exception of hospice care. And they can no longer require greater cost-sharing than Medicare does for expensive treatments like chemotherapy, dialysis, and skilled nursing care.

Medicare now approves each plan’s promotional materials, which has curtailed marketing abuses. Meanwhile, plans are in the second year of receiving bonuses based on their quality, which gives them a financial incentive to improve care. Advantage plans are the only kind of Medicare coverage for which quality is regularly measured and reported to the public. Almost as important is that beginning next year Advantage plans must pay out 85% of their premiums for healthcare (premiums include the monthly payments the plans receive from the government).

With the major coverage issues resolved, critics have re-directed their focus to whether government is overpaying the plans. But seniors don’t have much stake in that discussion. In fact if the plans are overpaid, it may result in superior benefits for people who enrolled in the plans.

At this point it’s fair to say that Advantage plans are viable low-cost health insurance. They are not for everyone, however, and even when they do meet someone’s needs, that may change at a later stage of retirement. People in rural areas may find there aren’t good plans available, and people with health problems may not be able to find a plan that’s a good fit. Seniors who have employer coverage may also find that the cost difference is not enough to make up for the network restrictions – even though for individuals an employer-sponsored Advantage plan may be effective (last year 2.4 million Advantage enrollees were in plans sponsored by their employers).

How can seniors know if an Advantage plan is right for them? For starters, the chances are much better if they are in good health. With the exceptions of Special Needs Plans, Advantage plans are designed to appeal to the hale and hearty who don’t require many treatments and visits to the doctor’s office. The plans are sometimes criticized for tilting their benefits toward younger seniors in fit shape, which boosts the plans’ profit margins. Health seniors, though, can benefit from this prejudice, and they are a wide majority of the Medicare population. Some 76% of people 65 and older rate their health as good, very good, or excellent, according to the most recent government data.

A second consideration is the number of specialists someone sees – if more than three or four, it may be difficult to find an Advantage plan with a network that includes all of them. PPO’s enable people to go out of network and receive some coverage, but if someone has several doctors who are not in the PPO network, then the higher co-pays may cancel out much of the savings. That’s particularly true if the out-of-network doctor is likely to order expensive services such as surgery and radiation.

Another factor is the price of Medigap coverage in an area. In high-cost locales like Florida and the state of New York, a Medigap policy and stand-alone drug plan can cost $3,000 or more a year, which makes Advantage plans more appealing. Ironically, a county or state’s high medical costs will Medigap premiums in the area, but it will also increase payments to Advantage plans, which can be used for extra benefits (this year Medicare is beginning to reduce the overpayments to Advantage plans in the areas with the highest medical costs).

Finally, to select a specific plan seniors will need to dig into the data, which requires using Medicare’s Plan Finder. What are a particular Advantage plan’s costs for their drugs? What is a plan’s out-of-pocket limit, and how good is its quality rating? Are all of their doctors in the plan network, and if not, how much will it cost to go out-of-network for non-emergency treatments? While this digging into the details can be time-consuming, it will often save people huge chunks of money and reduce the chances of their being dissatisfied with their choice later.

In one respect health insurance choices are similar to investment choices. A 65-year-old may reasonably assume more risk than an 80-year-old. With investments, financial planners typically recommend an asset allocation and investment portfolio for the next year or so. Then they re-evaluate the portfolio annually, rebalancing it and changing specific investments as needed. Often they will adjust a portfolio’s risk as people age, so that an older person will have a larger percentage of savings in bonds and other fixed-income investments.

That same approach works for health insurance, especially in retirement when there are hundreds of combinations of companies and coverage that may change benefits and prices yearly. Because 65-year-olds may have as much as one-third or more of their lives remaining, it’s not likely that their choices of health plans are one-time decisions.

Over the span of retirement, their medical needs will change and their spending patterns will shift. Even those seniors fortunate enough to have employer supplemental plans should assess their coverage during annual open enrollment. And in almost any type of retirement portfolio, a well-rated Advantage plan is a solid choice and an effective way to save thousands of dollars, over time. ◊◊

The next blog post will be February 19

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