As a Medicare insurance broker, I am in the process of getting ready to offer the next year’s products. Insurance companies are also getting ready to advertise next year’s plans, and clients are beginning to wonder if this is the year they should make a major change. Every year, marketing during the Medicare Annual Election Period [AEP] has gotten intense, and there is no evidence to show it’s slowing down. As trusted advisors, you can expect clients to go to you for advice as their opportunity to change plans approaches. Fortunately, you do not need to know the intricacies of the two main types of competing products to be able to advise on financial impacts of them. Here’s the basics of what all financial advisors need to know.
What Is a Medicare Supplement?
A Medicare Supplement, very simply, does exactly what its name implies. It supplements Medicare. Medicare does not pay 100% of most bills. In a very condensed nutshell, one part of Medicare leaves a series of daily copays and a deductible for hospital admissions, and another part usually leaves 20% of all medical bills without any kind of catastrophic stop loss. What a Medicare Supplement does is simply pay the remainder of charges that Medicare approves, but does not pay. Have a $100 doctor charge? Medicare leaves $20, the supplement pays it. If Medicare says “no” to the charge and pays nothing, neither will the supplement. That’s it. For a healthy person, it pays all remaining Medicare-approved charges. For a very sick person, it pays all remaining Medicare-approved charges as well. That’s all. Simple concept. The financial catch: it is true health insurance. You have a premium to pay whether you use it or not. Premiums also go up over time.
Like major medical insurance, your client will have to plan their budget for health insurance premiums as well as drug costs. However, unlike major medical insurance, an insurer still can choose to underwrite. In other words insurers can ask additional questions and then choose to accept or deny you their coverage except when you are first eligible. That means if you are sick or recently recovered from a medical condition and decide you want a Medicare Supplement, there is a chance you may not be able to get one. This is the reason to choose a Medicare Supplement early on when you are first eligible or you’re your client is still healthy. Some states have guaranteed enrollment options where this is not the case. Be sure to check with your state.
What Is Medicare Advantage?
Medicare Advantage [MAPD] is a way to get Medicare benefits through private insurance as an alternative to getting them through the regular Medicare program. Your client is still enrolled into Medicare, and their Medicare Part B premiums are still required to be paid. But their benefit payments would be dictated by the insurance company they choose rather than by Medicare. They are still required to cover all the basic Medicare benefits at approximately the same level as Medicare would. However, each insurance company chooses how much of each benefit they actually cover.
The primary difference for you to understand is there is no supplement to an MAPD plan. Your client must be prepared to pay copays and coinsurance, and possibly an additional premium for everything they do. There are number of other things beyond the scope of this article to be aware of, such as provider networks and annual changes to the benefits. But in general, know that the healthier the client, the less they will use benefits. The less they use benefits, the less they pay. The financial catch: If a major health issue arises, they must pay more than they would when they were healthy. There is a catastrophic stop loss; I generally tell my clients to be prepared to pay at least two years’ worth in copays and coinsurance in case a medical emergency hits at the end of the year and continues into the next when the stop loss resets to zero.
The perk of these plans is they typically have either no premium or a very low premium when compared to a Medicare Supplement. The most common question I get from clients during this period is why they should be paying a premium for a supplement when Medicare Advantage has none. The MAPD plans have that catastrophic stop loss amount which, in most states, is typically three times the amount of a Medicare Supplement premium for most people. In other words, a client could potentially pay three times more on the MAPD than they would have if they were on a supplement, even if they are in an MAPD with no monthly premium.
What About Prescription Drugs?
Medicare Part D is not part of Medicare Supplements and must be purchased at additional cost. Part D plans are all different and no one plan is the right choice for every person. The additional premium is very low. For many people it’s about 20% or less than the cost of a Medicare Supplement premium and is added on for Part D plans. The financial catch: The benefit of getting a separated drug plan from the medical plan is you have the ability to control those drug costs a little better, when proper care is exercised in selecting the drug plan. But you have yet another premium to pay. With this route, the client can find the drug plan that is best tailored to their needs and can be changed annually as the need arises.
Medicare Part D is part of the Medicare Advantage plan (that’s what the “PD” stands for in MAPD, if you couldn’t tell). You get their drug plan, typically at no additional premium. However, with a couple of unusual exceptions, you are required to take the prescription plan they give you. If your plan has no drug coverage attached to it, you most likely cannot add it. The financial catch: you get their drug plan. Period. If it is the lowest cost for your client, they win. If they get a drug that either isn’t covered or is not covered well, they most likely will have to change the medical plan to accommodate the cost of their drug needs.
What About Extras?
If you asked me what one thing has not only taken more of my time in recent years but led to more distracted discussions about things that are not important to my clients, it is these “extras” currently being heavily marketed in health insurance. Don’t be fooled. Here’s what they are. In general, most extras fall within the purview of MAPD plans. They include access to gyms, an over-the-counter drug benefit, home meal delivery, a glasses stipend when Medicare does not cover them, and most heavily advertised: dental coverage.
Medicare Supplements are slow to adopt extras. Some are now finally covering fitness, but for the most part, consider nothing extra on a Medicare Supplement. But extras are almost always front and center in a Medicare Advantage marketing campaign. The financial catch: there’s a lot. The first thing to understand is there could possibly be a real financial benefit on some of these extras, but it is not the panacea your client may think it is. In general, the glasses benefit may only be several hundred dollars once every couple of years. The dental that is covered at presumably no charge may just be preventative, offering your client an option to “buy-up” to traditional dental insurance. This will typically be at a cost that is equivalent to what they would pay if they obtained that coverage separately, similar to choosing a supplement. And the OTC benefit is typically low.
All of these benefits should not cloud the main issue. As your client’s trusted financial advisor you should be asking, “if you have a heart attack, stroke, car accident, or get cancer, are you more comfortable paying an MAPD’s maximum out of pocket, or are you more comfortable budgeting in a Medicare Supplement’s premium?” The extras are real money being given to your clients. Just don’t let them lose perspective on what your clients really want when they need their coverage to be there in a medical emergency.
Anything Else I Should Know?
On June 25, 2021, the Kaiser Family Foundation published a report by Biniek et al. discussing the realities of Supplement versus MAPD consumer costs. The most important part of this article for a financial advisor is this: “These findings may run counter to expectations, given that Medicare Advantage plans, unlike traditional Medicare, have an out-of-pocket limit for Medicare-covered services, may have reduced cost-sharing for Medicare-covered services and often include coverage of vision, hearing, and dental services.”
“However, Medicare Advantage plans, like traditional Medicare, generally impose cost-sharing requirements for covered services, subject to certain limits, such as daily copayments for inpatient hospital stays or coinsurance for physician administered drugs, which means that Medicare Advantage enrollees may incur thousands of dollars in out-of-pocket costs for covered benefits before reaching their plan’s maximum out-of-pocket limit.”
I’m not a financial advisor, I only offer Medicare-related health insurance. But when I go over costs with a client, no one – not a single person – is happy about a Medicare Supplement premium. On the flip side, no one is happy with those out-of-pocket MAPD maximums either. But those are the choices. “Which bill are you okay with paying?” That is the heart of the decision. The extras on MAPD are not even part of our discussion. A client’s answer to that question is the foundation we build on for financially planning a health insurance program with the Medicare-eligible.
Elie Harriett co-owns Classic Insurance & Financial Services Co., specializing in Medicare-related insurance, and is a trustee of NAIFA-Ohio. Harriett can be reached at firstname.lastname@example.org.