An old cynical joke says that when you buy life insurance, you are betting that you are going to die, while the life insurance company is betting that you are going to live. Having just survived the annual mail onslaught from prospective Medicare supplement providers, I found it helpful to view the different plan options as bets on several different probabilistic events occurring. While the Medicare open enrollment window has closed for this year for most people, this post may help you to better understand the bets you are taking on your own healthcare.
Part B “Medigap” versus Part C Medicare Advantage
Basic Part A Medicare covers most in-patient hospital costs. Part B is optional, and for a monthly deduction from your Social Security check, it covers up to 80% of the cost of many medical expenses NOT covered by Part A, mostly outpatient provider visits and procedures. You can also purchase an optional private “Medigap” insurance policy to cover some or most of that 20% Part B shortfall. It is here where the bets get interesting.
Part C, also called Medicare Advantage, allows private insurance companies to package the Part A and B services (and some Part D prescription benefits) together to provide certain additional benefits, such as some dental procedures, or to reduce monthly costs to the insured person. These savings are usually accomplished by restricting the network of available providers to a limited set of contracted hospitals, doctors, and other healthcare providers.
Medicare Advantage deserves its own separate post, but just let me state upfront my bias and “Buyer Beware” caveat. I estimate that 90% of the mailings I received coming up to the open enrollment deadline (a daily flood in my mailbox) were from Medicare Advantage packagers. Just as with the incessant prescription medicine advertisements on television, you can assume that companies market very heavily only when there is a lot of potential profit in it for them. You are their “profit mark.” Be very suspicious. They likely know more than you do and take advantage of that
Medigap programs, on the other hand, are free from many of the Medicare Advantage restrictions on providers. As a result, Medigap plans are closer to “true insurance,” where companies work on slim margins and well-tested actuarial formulas to set prices and to move money from patient to provider as efficiently as possible. As a result, they advertise less than the Advantage plans.
Each state has some control over Medigap plan details and prices, but the plans offered must fall into the ten plan categories shown below. The green check marks indicate 100% coverage of the item, while the red X’s indicate zero coverage. This is where the bets are going to come in. You will pay less to take on more risks, and vice versa, pay more to cover a broader set of probabilities. In most cases, you can even use the differences in premiums between plans to get a feeling for the probabilities the actuaries use, and so make a more informed bet.
Bet #1 – Things won’t change. The natural urge is to find the cheapest plan available if you currently have no medical needs. However, once in a plan, the insurance companies can take your health status into consideration and charge you a higher rate if you decide to switch after you get sick. My take on this bet: when you are over 65, things will eventually change. By the way, this is one of the biggest Medicare Advantage risks; getting out of your plan is often much harder than getting in.
Bet #2 – The “major medical” bet. Plans K and L are usually among the cheapest supplement plans because they cover the least of that 20% shortfall. On the other hand, they put a top limit on “out of pocket” costs of $5,560 and $2,780, respectively, in 2020. If you are generally healthy and have no problem covering that amount of expense, then these plans may be a good bet (subject to Bet #1). Doing it just to save money, however, is usually not a good idea.
Bet #3 – The Part A deductible bet. While Plans K and L, as noted in Bet #2, cover a part of the annual $1,408 deductible for hospital-related Medicare Part A charges, Plan A covers none of it. This is not a bad bet if you can easily pay that size of a bill if it hits, but the other missing coverages, discussed in more detail below, generally make this plan a risky option for most people.
Bet #4 – The Part B deductible bet. With Plans C and F, you pay a bit higher monthly premium, but you may well never see a bill because they cover the annual Part B deductible, which is currently $198. Just like car insurance deductibles, however, this is relatively expensive insurance. First of all, if you can’t cover a $200 medical bill, you likely have financial problems that none of these plans can fix. Most people would be financially better off by sticking $20 every month in an envelope marked “Medicare Deductible.” You will likely have money left in the envelope at the end of the year. These two plans are now closed to new entrants, so for most of us this option is moot.
Bet #5 – I won’t need skilled nursing care. These days, hospitals will dump Medicare patients pretty quickly into a skilled nursing facility for recovery or rehabilitation. The rules are complicated, but in 2020 a “coinsurance” fee of $176 per day kicks in if they send you to one of these facilities. Plans A and B save you money monthly by letting you take on that risk. However, that fee can add up quickly. There is a high probability that I will one day need skilled nursing care, as will you, which make Plans A and B undesirable in my opinion.
Bet #6 – Excess doctor charges. My experience has been that most doctors in my part of the country will settle for the standard Medicare reimbursement rates for in-office visits or procedures. In some case, however, providers can charge up to 15% above that rate in “excess charges.” So, if a doctor gets $100 from Medicare for an in-office visit or procedure, they could possibly bill you for another $15. Plans F and G cover these charges, but you will pay a higher monthly premium to get that protection. Plan N goes the other way. You not only are liable for those charges, but you may also have to pay a per-visit co-payment, usually in the $20 range, in exchange for a lower monthly insurance payment. The bet here is whether you can afford these relatively-small charges if and when they hit. You can also make sure in advance that any new provider takes standard Medicare reimbursements.
Bet #7 – Do I travel internationally? Medicare provides some coverage if you get hospitalized abroad, but there are significant limitations. Six of the plans noted above reimburse 80% of some uncovered charges, such as ambulance rides. If you travel, this bet is probably worth the money, but you should also get additional travel insurance. Insurance that most people never collect on, like travel insurance, is usually relatively cheap and worth it.
How well do you sleep?
I measure personal medical and financial risks based on how well I sleep at night. If my risks are keeping me awake in middle-of-night terrors, then spending some money to ameliorate some of that risk is a good deal in my book. My bets have pushed me to Plan N. I can financially handle miscellaneous medical charges like co-pays, and even the Part B deductible, but I am willing to shell out some monthly bucks to cover larger amounts. Your mileage may vary.
The downside of this many plan options is that many people wind up going with plan with the cheapest monthly premium because they can’t find room in their budgets for the more expensive plans. These are often the same people who cannot afford these seven risks should their bets fail them. That is a whole different discussion on the difficult questions of economic justice hard-baked into our healthcare system.
If you disagree with my analysis, see an error, or simply have some words of wisdom, feel free to comment below. Stay well!
My follow-up post on “The bad Medicare Advantage bet” has now been published. Click on the Facebook or Twitter icons to be notified of new posts, or enter your email address in the “Subscribe” box on the left of your screen (or scroll down on your phone to the “Subscribe” box).
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