Why You Should Avoid Medicare Advantage

By J. Matthew Illian

NEW YORK ( AdviceIQ) -- Medicare Advantage has disadvantages that make health care more expensive for seniors. Recent changes to the laws such as Obamacare are likely to raise costs. Most retirees are better off with regular Medicare.

Medicare Advantage is an option that replaces Original Medicare parts A (hospital care) and B (doctor visits) and often includes part D (prescription coverage) as well; it goes through a private operator, while the government runs part A, B and D.

The primary reason some choose Medicare Advantage is to minimize their monthly costs. It covers everything Medicare covers, but the devil is in the details. This monthly premium advantage could quickly become a disadvantage in several different scenarios.

One reason you should avoid Medicare Advantage is because your options become limited to a predefined private health care network. Seeking care outside of this network quickly leads to escalating financial woe.

The limitations of this network go beyond asking your primary care physician if he or she participates. In life-threatening situations, a limited network can put you in a terrible predicament. If one day you need a heart transplant or are stricken with a rare form of cancer, you may be stuck paying out-of-network fees if you seek a doctor or treatment center with the most expertise. You can bet that the Johns Hopkins Hospital has never heard of your local insurance network.

A second disadvantage of Medicare Advantage is relevant if you spend long periods away from home. Medicare Advantage plans cover emergency services, so there's no reason to avoid taking one cruise, but all other nonemergency services are charged at the out-of-network price.

Some special policies allow snowbirds from the Northeast to remain in-network when they spend the winter in Florida and still get regular care, but this applies only to a limited set. If your vacation home is out of state, expect to pay a hefty price for physical therapy, doctor visits and prescriptions.

A third larger problem faces Medicare Advantage participants as Washington looks for ways to cut the budget. The government pays a hefty subsidy to private health insurers for each Medicare Advantage plan, and these subsidies are scheduled to be reduced drastically in the coming years. The largest insurer, UnitedHealth, expects a 4% drop in subsidies beginning next year, while health care costs are projected to rise 3%, according to the company. Much of these cuts were part of President Barack Obama's Affordable Care Act.

Medicare Advantage recipients should expect to see their monthly premiums rise to compensate for these cuts. The Heritage Foundation estimates that by 2017, retirees in certain regions might see subsidies cut by as much as 45%. Ascension County, La., loses more than $9,000 per enrollee, according to the think tank's calculations.

As monthly premiums rise and extra benefits such as gym memberships and other preventive health measures disappear, seniors are more likely to switch to regular Medicare. The Congressional Budget Office projects that the law's payment cuts alone can result in more than 4 million fewer people enrolled in Medicare Advantage by 2018. Currently, only a quarter of all Medicare participants opt for the Medicare Advantage option.

But some seniors might feel trapped in it. Although Medicare Advantage participants can switch to original Medicare every year during the open enrollment period without underwriting or extra cost, the same cannot be said for supplemental Medigap plans.

Medigap policies supplement Medicare by covering the excess coinsurance payments among a number of costs that are typically paid out of pocket. A $100,000 doctor service could leave a Medicare participant, who doesn't have a Medigap policy, with a $20,000 bill. Few retirees want to take this risk, and so they sign up for a privately managed Medigap policy. These private supplemental policies offer essential coverage for what might otherwise be a financially catastrophic illness.

If you switch from Medicare Advantage to original Medicare, Medigap policies are allowed to jack up the premiums if you have preexisting health conditions.

If your Medicare Advantage program shuts down and no longer offers insurance, though, you can get a Medigap policy without medical underwriting. Additionally, residents of New York and Connecticut have state laws that allow them to switch at any time without medical underwriting or extra cost.

If you live outside these states and have an imperfect health record, you might have to pay significantly higher premiums for Medigap plans. And with Medicare Advantage in the cross hairs of a political battle over the future of government-funded health care, limited service networks and lack of nationwide care, it's a no-brainer to go with original Medicare.

-- By J. Matthew Illian, wealth manager for Marotta Wealth Management. He is based in Richmond, Va., providing fee-only financial planning and wealth management at emarotta.com and blogging at marottaonmoney.com.

AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions.

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AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions.