Original Medicare vs. Medicare Advantage and how to choose

One of the biggest points of emphasis when meeting with my clients (and hosting educational programs) is explaining to them what the differences are between Original Medicare and Medicare Advantage.

When someone first becomes eligible for Medicare, they have a choice–they can either stay in Original Medicare (which you’re enrolled in by default), or instead, they can get their Medicare benefits from a Medicare Advantage plan.

One of the reasons it’s so confusing to people is that Medicare Advantage is referred to as “Part C” of Medicare, so people tend to think it’s something they have, or need to purchase along with their other Medicare benefits.

Let me set the record straight though:

Medicare Advantage is not a part of Medicare per se — it is an alternative to Medicare. It’s something that you have instead of Original Medicare. Why it’s referred to as a part of Medicare is beyond me because all it does is cause confusion, and at the end of the day, it’s really not a part of Medicare at all.

It’s very important to understand the differences between Original Medicare and Medicare Advantage because it’s possible that you could be stuck in one of the two for the rest of your life. I’ll explain this in a bit.

When meeting with clients, I like to help them visualize the differences because you can read the “Medicare and You” handbook until you’re blue in the face and still not really comprehend what you’re reading.

I have personally always been a visual learner and I think it really helps in a situation like this where there are several moving parts. I have a dry-erase board in my office that really comes in handy when going over this.

As you can can see in the illustration above, Original Medicare comes in separate pieces whereas Medicare Advantage is “bundled” together in one singular “package”. That “package” sometimes includes “extras” that you can’t get with Original Medicare like vision, dental, and hearing benefits.

Some Advantage plans (and Medigap plans) also offer health club reimbursement features that will pay for your membership at participating health clubs.

Although these benefits sound like a nice feature, these “extras” often have scaled down benefits, and are more of a “sweetener” than a full fledged insurance plan so don’t hang your hat on them just yet.

Prescription Drug Coverage

You’ll also see that the Medicare Part D prescription drug coverage is included in the Advantage plan “package” (although some Advantage plans can also be purchased without drug coverage). This can be very convenient, but at the same time detrimental because if your health and/or drug needs suddenly change and you want to change drug plans during the Open Enrollment period, you’ll have to change your entire Advantage plan along with it (because it’s all one piece, or “baked in”).

In Original Medicare, the Part D drug coverage is a separate “stand alone” piece, so if you want to change your drug plan only, you can, without it effecting your other benefits.

Benefit Structure

Another big difference is the benefit structure between Original and Medicare Advantage. Under Original Medicare, your Part A and Part B benefits come from the government, while your Medigap and Part D drug plan come from a private insurance company.

With Medicare Advantage, the entire “package” comes from a private insurance company so you would be bypassing Original Medicare completely and getting all of your benefits from the Advantage plan.

In Original Medicare, the deductibles, co-pays and coinsurance are pretty much set in place (although they do change a little bit from year to year) whereas in Medicare Advantage, the benefits are different from plan to plan.

For example, the Medicare Part A (hospital) deductible under Original Medicare is $1156 (in 2012). That deductible covers you for the first 60 days you’re in the hospital. If you have a Medigap plan which is designed to eliminate some or all of the cost-sharing under Original Medicare, that $1156 deductible will be paid by the Medigap plan–not you, so ultimately if you have a Medigap plan that covers that deductible (most do) you will pay $0 if you are admitted to the hospital.

Conversely, with a Medicare Advantage plan, if you are admitted into the hospital, instead of paying $0, you will pay a flat, per-day deductible that is dictated by your Advantage plan.

Let’s say Joe has an Advantage plan and he goes into the hospital. His Advantage plan’s hospital benefits cover him at 100%, but only after he pays $250 per day for the first 5 days of his hospital stay (total of $1250).

So if he’s in the hospital for 5 days he’s going to spend $1250. If he’s in for 3 days, he owes $750. If he’s in for 12 days he owes $1250. See how that works? The most he is responsible for is the first 5 days of any given hospital stay, and if he leaves, and then goes back into the hospital again, the 5 day-stay rule starts all over again.

To prevent someone from spending hundreds or thousands of dollars in hospital deductibles and other cost sharing, Advantage plans have an out-of-pocket maximum, or cap, that prevents them from going broke if they are in and out of the hospital multiple times throughout a 12 month benefit period.

That cap is most commonly set at $6700, although some Advantage plans do have lower caps like say $3400. It all depends on what Advantage plan you have.

That’s just one example of the differences in benefits. There are also differences in the co-pays and coinsurance structure for covered services. In a Medicare Advantage plan, there are generally co-pays that you must pay out-of-pocket if you visit a doctor or specialist.

In Original Medicare those co-pays are picked up by your Medigap plan (depending on which Medigap plan you have). In Original Medicare, there is generally a 20% coinsurance that you must pay under Part B (medical) after the $140 Part B deductible is met. This coinsurance is paid by your Medigap plan if you have one.

In lieu of coinsurance, Advantage plans generally have deductibles and/or copays for covered services that you must pay out-of-pocket.

Pricing

Another difference is the pricing. Whether you’re on Original Medicare with a Medigap plan or in a Medicare Advantage plan, you’re still going to have to pay the Medicare Part B monthly premium so that part of the equation is a wash. Really what you’re comparing at the end of the day is the difference in price between an Advantage plan and a Medigap plan.

Medicare Advantage plans are almost always going to be less expensive in the long run than being on Original Medicare with a Medigap plan unless you are gravely ill and in and out of doctors appointments and hospitals every other day. Remember though, the coverage works differently and there is more out-of-pocket cost sharing in an Advantage plan (if you are using it all the time).

Medigap premiums are rated three different ways, and that will be covered in a different article, but for now let’s just say that they are based heavily on your age, whereas Advantage plans aren’t. Both Advantage and Medigap plan premiums generally increase over time, but historically Medigap premiums increase faster, and by a larger premium percentage because as you age, the premium increases.

With Advantage plans, if the rate goes up, you’ll usually know in advance, and it won’t happen until the end of the year. Medigap rates can go up unexpectedly at any time.

Underwriting, Usage & Availability

Last but not least, you need to be aware of the underwriting requirements and availability for both Advantage and Medigap plans.

When you first enroll in Medicare, as I mentioned above you can either enroll in a Medicare Advantage plan or stay in Original Medicare. If you choose the latter, you have 6 months from the date your Part B takes effect to enroll in a Medigap plan without any form of underwriting.

You won’t have to answer a single question about your health. However, after that 6 month period expires (also known as the Medigap open enrollment period) you will have to now answer those health questions and pass underwriting if you want to change Medigap plans later. It’s very important to remember that.

People call me all the time wanting the review and/or change their Medigap plan during the Open Enrollment period which is fine, but you can change a Medigap plan any time you want, not just during Open Enrollment. The caveat is like I just mentioned, you have to be healthy enough to pass underwriting.

If you enroll in a Medigap plan from the start, and your health goes downhill, there is no guarantee you can change your plan later if you wanted to. You could be stuck in that plan for the rest of your life, and if and when the premiums go up, there might not be anything you can do about it.

There are however some situations that will grant you a guaranteed entry period into a different Medigap plan. This is also known as a Special Election Period (SEP).

On the flip side, you can change a Medicare Advantage plan every year if you choose during the Open Enrollment Period and the only question you have to answer is whether or not you have End Stage Renal Failure (ESRD). You could have every other conceivable disease in the book, but as long you don’t have ESRD, you can change the Advantage plan every year if you want– no other questions asked.

However, if you enroll in an Advantage plan from the start and want to switch over to Original Medicare later in life, that’s fine and you can do that during Open Enrollment, but, there is no guarantee you’ll be healthy enough to qualify for a Medigap plan. You could potentially be stuck in that Advantage plan for the rest of your life if you’re not healthy enough to pass underwriting for a Medigap plan so it’s important to make your initial decision carefully because it could be a permanent one.

Medigap plans are more widely available than Medicare Advantage plans, and there are more companies that offer Medigap plans than Advantage plans.

The two most common types of Advantage plans are HMO’s and PPO’s. When you are in these types of plans, you are going to be in a managed care network. You will most likely need a referral or some kind of prior authorization (depending on your plan) if you want to visit certain doctors or facilities. If you leave your plan’s network you will have limited coverage, or worse, no coverage at all. You also have to make sure your doctors accept your plan.

In Original Medicare your coverage (including your Medigap plan) is completely portable meaning that you can go to whatever doctor or facility of your choosing regardless of where they are so long as they take Medicare. This is particularly valuable in the event someone develops a condition that only a handful of doctors can treat, and maybe one of those doctors is out of state.

Feel free to download Medicare’s official documentation on the differences between Medicare Advantage and Original Medicare as well.

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There is obviously a lot to cover and evaluate when comparing these two programs, and if you’re still confused feel free to contact me directly for help, and don’t forget you can always leave a comment or question in the comments area below!

About Chris Langille

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