Your first big decision: Original Medicare or Medicare Advantage?
A view from the cost perspective
Your first task is to understand the strengths, weaknesses and costs of Original Medicare (the government program) and Medicare Advantage (the private alternative).
Here’s a quick overview:
Original Medicare gives you great flexibility. You can choose any doctor in the U.S. that accepts “Medicare assignment” (and most do). And you can see specialists without asking permission. But your out-of-pocket costs are open-ended unless you buy a private policy to help cover the gap. You’ll also have to buy a standalone prescription drug plan if you want help paying for medications.
Medicare Advantage plans cover the same services as Original Medicare, but they bundle in other benefits. These can include dental, vision, fitness, hearing – and prescription drug plans. Out-of-pocket costs are limited to an annual maximum. But you’ll likely have to stay within a network of providers in your local area. (Medical expenses away from home are only covered in emergencies.) Also, you’ll need referrals from your primary care physician or insurer to see specialists.
Despite these inconveniences, enrollments in MA plans have doubled over the past 20 years to nearly 40% of people with Medicare. The reason could be its cost structure.
Most people don’t pay a monthly premium for Part A (hospitalization coverage) because they qualify with Medicare taxes paid through work. But everyone pays the monthly premium for Part B (medical coverage). In 2022, this premium starts at $170.10 and goes higher depending on your income. But that is where the similarities end.
With Original Medicare, only about 80% of your Medicare-approved costs are covered. That means you are responsible for the remaining 20%, which can add up quickly in the case of a severe illness. Out-of-pocket expenses are open-ended with no maximum. Some Original Medicare participants buy a private supplement insurance (or Medigap plan) to help cover that 20% and lessen the risk.
Medigap monthly premiums vary considerably by zip code, age, gender and the plan you choose. The more a plan covers, the higher the premium. (You pay nothing beyond your premium with the best Medigap plans available today – except the Part B deductible, which in 2022 is $233 per year.)
Most people with Original Medicare also buy a private Part D prescription drug plan. The average premium for Part D coverage will be $33 per month in 2022, plus part of the cost of your prescription drugs.
In summary, with Original Medicare, you could be paying:
a monthly Part B premium of $170.10,
an annual Part B deductible of $233,
a monthly Medigap premium and
a monthly Part D drug plan premium of $33.
You would also pay whatever Part A and Part B expense Medigap does not pay, plus what your Part D drug plan doesn’t pay for your prescription drugs.
With Medicare Advantage, you could pay:
a monthly premium as low as $0, although the average premium for 2022 will be $19 per month.
up to $7,550 in out-of-pocket for in-network Parts A and B services and
a monthly Part D drug plan premium of $33 if your Medicare Advantage plan doesn’t cover prescription drugs.
You would also pay whatever your plan doesn’t cover of your prescription drug costs. Please note that the actual amount you pay for coverage from a Medicare Advantage plan will depend on the specific plan’s costs which can vary widely.
And remember that the premiums you pay are just part of your total costs. How you use your insurance will determine your out-of-pocket costs. For example, how many doctor visits (specialist or not) will you make? How many tests and what kind? How many prescriptions will be filled? Until you hit your out-of-pocket maximum (if you have one), each usage can cost a fixed fee or percentage.
Medicare Advantage plans may look more appealing from a cost perspective. But they could end up costing you more if you have a serious illness and need to access specialists or out-of-network medical care. In short, you may need to decide for yourself which is more critical: the flexibility of Original Medicare coverage or lower costs.
Sources: Kaiser Family Foundation. A Dozen Facts About Medicare Advantage in 2020. kff.org (accessed November 17, 2021). Centers for Medicare & Medicaid Services. CMS Releases 2022 Premiums and Cost-Sharing Information for Medicare Advantage and Prescription Drug Plans. cms.gov (press release dated September 30, 2021). CMS Releases 2022 Premiums and Cost-Sharing Information for Medicare Advantage and Prescription Drug Plans.