Medicare Advantage Plans have become an increasingly popular alternative to Original Medicare. Nearly 30 million of the 59 million Medicare beneficiaries were enrolled in Medicare Advantage Plans in 2022.
A key appeal of Medicare Advantage is that many plans have zero premiums beyond the cost of Part B coverage. The availability of plans with little to no premiums often leads to the assumption that Medicare Advantage costs less overall than Original Medicare. But the true comparison between the costs of Medicare Advantage vs. Traditional Medicare is more complex.
When evaluating whether Medicare Advantage is more affordable than Original Medicare, you need to look at several factors:
- Monthly premiums
- Out-of-pocket costs like copays and coinsurance
- Maximum annual out-of-pocket spending limits
- Extra benefits included
- Medicare Advantage Plan stability from year to year
Understanding how all these pieces fit together is important to determine if Medicare Advantage offers lower costs and better value for your health needs and budget compared to Original Medicare.
How Medicare Advantage Plan Costs Work
Medicare Advantage Plans are offered by private insurance companies approved by Medicare. When you join a Medicare Advantage Plan, you still have Medicare and pay your monthly Part B premium. But instead of Original Medicare covering your benefits, the Medicare Advantage Plan administers your coverage.
These private Medicare Advantage Plans receive payments from the government to provide your Medicare benefits. Plans are paid a set amount per enrollee, based on average Medicare spending in your location. This is called a benchmark or capitation rate.
Medicare Advantage Plans must provide the same level of benefit coverage as Original Medicare does under Medicare Parts A and Part B. But Medicare Advantage Plans can use the government reimbursement amount to structure costs and coverage differently than Original Medicare within certain parameters.
Plans keep their overall Medicare costs within the benchmark amount in a variety of ways:
- Lower provider reimbursement rates – Pay doctors, hospitals and facilities less than Original Medicare rates for services.
- More utilization controls – Require prior authorization for procedures, limit networks to lower cost providers.
- Negotiate drug costs – Get discounts on prescription medications from pharmaceutical companies.
- Focus on preventive care – Emphasize preventive services and chronic disease management to reduce health complications.
- Limit plan offerings – Restrict the number of plan options available to beneficiaries in a region.
- Additional premiums – Charge a monthly premium for enhanced benefits beyond basic Medicare coverage.
- Yearly out-of-pocket maximum – Set an annual limit on how much enrollees pay in total for covered medical services. Original Medicare health insurance does not have an out-of-pocket cap.
- Patient cost-sharing – Require copays, deductibles and/or coinsurance amounts for certain services that go toward the annual maximum out-of-pocket costs.
This ability to tailor benefit packages and costs enables many Medicare Advantage Plans to offer coverage with little to no premium beyond the Part B premium. But just because there is no monthly premium does not necessarily mean Medicare Advantage will cost you less overall for your care.
Does Medicare Advantage Have Lower Overall Costs than Traditional Medicare?
To determine if Medicare Advantage Plans truly cost less than Original Medicare requires looking at total plan spending per enrollee. This includes both the government’s average payments to plans per enrollee as well as beneficiaries’ average out-of-pocket costs.
Several factors indicate Medicare Advantage Plans generally have lower overall costs than Original Medicare:
- Medicare payments to plans are less per enrollee – The average government benchmark payment to Medicare Advantage Plans per enrollee is approximately $10,000 per year while average spending per enrollee in Original Medicare is around $12,000 per year according to the Kaiser Family Foundation.
- Plans have flexibility to negotiate costs – Medicare Advantage Plans can use their leverage to negotiate lower provider payments, drug costs and other utilization management restrictions that account for lower per enrollee spending compared to Original Medicare.
- Extra benefits and yearly out-of-pocket maximum – Most Medicare Advantage Plans include dental, vision and other benefits not covered by Original Medicare as well as a yearly limit on out-of-pocket medical costs that provides financial protections.
- Lower cost settings – Medicare Advantage Plan networks emphasize lower cost primary care settings and steer patients away from more expensive hospitals when feasible.
However, some crucial caveats around Medicare Advantage costs to consider are:
- Higher cost regions – In some higher cost metropolitan areas, the benchmark payment to Medicare Advantage Plans exceeds average per capita Original Medicare spending, meaning the plans get paid more in those areas.
- Enrollee health status – Medicare Advantage Plans historically attracted healthier enrollees so their costs per person were lower, but payment rates are now more risk-adjusted based on health status.
- Plan instability – Medicare Advantage Plan benefits, provider networks and service areas can change yearly, so savings one year do not guarantee lower costs the next year.
- Cost optimizations – Medicare Advantage Plans now enroll more patients with complex needs and have tightened networks and utilization controls, so some costs are catching up with Original Medicare.
While Medicare Advantage Plans still generally have lower per enrollee costs than Original Medicare, the savings difference has narrowed over the past decade as plans took on riskier and costlier patients.
But Medicare Advantage enrollees also face different cost-sharing rules and restrictions than Original Medicare beneficiaries do. So even with overall lower plan costs, what individual enrollees pay out-of-pocket can still vary significantly between Medicare Advantage vs. Original Medicare.
Medicare Advantage vs. Original Medicare Out-of-Pocket Costs
Your personal spending on deductibles, copays and coinsurance for covered medical care will depend on whether you join a Medicare Advantage HMO or PPO plan versus enrolling in Original Medicare.
Here are some key ways out-of-pocket costs may differ:
- $0 premium plans available but can have copays and coinsurance
- Out-of-pocket medical costs apply to a yearly limit (e.g. $4,000 or $6,700)
- Many plans offer some supplemental benefits not covered by Original Medicare
- Typical costs: $0/month premium + $50 specialist visit copay + 20% coinsurance on procedures
- Higher monthly premium for Part B ($170 in 2023)
- No yearly out-of-pocket medical cost maximum
- No dental, vision or hearing coverage
- Typical costs: $170/month premium + 20% coinsurance on all services
Medicare Advantage vs. Original Medicare with Supplemental Insurance
To handle Original Medicare’s potentially unlimited out-of-pocket costs, many enrollees purchase a supplemental Medigap policy.
- Medigap Plans cover copays, coinsurance and deductibles, but have monthly premiums
- Typical costs: $170/month + $150/month Medigap premium
As you can see, Medicare Advantage Plans structure out-of-pocket spending differently from Original Medicare. There is no uniform answer on whether your personal costs will be lower with Medicare Advantage or Original Medicare.
Key variables that impact your out-of-pocket costs include:
- Your anticipated medical needs and usage
- Premium costs of plans in your area
- Deductibles, copays and coinsurance charged by each plan
- Maximum annual out-of-pocket limits
- Supplemental benefits offered
- Your health status and risk profile
To determine which option represents the lowest costs for you, carefully compare Medicare Advantage Plans to Original Medicare with or without supplemental coverage in your area. Weigh both premiums and estimated out-of-pocket costs given your expected healthcare services. Also consider Medicare Advantage Plan stability from year to year.
Strategies to Reduce Medicare Costs
Whichever Medicare coverage option you select, there are also ways to seek financial assistance and maximize savings:
For help with Medicare costs:
- Medicaid dual eligibility
- Medicare Savings Programs
- Pharmaceutical company drug plan assistance
- State pharmaceutical assistance programs
To minimize out-of-pocket costs:
- Choose primary care doctors and specialists wisely to control referrals
- Use urgent care clinics and telemedicine to avoid ER visits
- Take preventive health steps to reduce potential illnesses
- Comparison shop annually for lower cost plans during open enrollment
- Participate in wellness programs to earn rewards and discounts
To evaluate plan costs and stability:
- Use the Medicare Plan Finder tool at Medicare.gov
- Review plan details like premiums, copays, networks, star ratings
- Confirm your medications are covered
- Check for plan exclusions or utilization controls
- Verify provider network participation
- Research insurer history and financial stability
The cheapest Medicare Plan isn’t necessarily the best choice if it lacks your doctors, restricts your care access or has less stable benefits from year to year. But with prudent shopping and resource optimization, you can aim to secure lower cost Medicare coverage that meets your healthcare needs.
Is Medicare Advantage or Original Medicare More Affordable?
There is no universal answer to whether Medicare Advantage or Original Medicare offers lower overall costs. It depends on your region, health profile and coverage preferences. Here are some key points to remember:
- Medicare Advantage Plans generally have lower per enrollee costs on average, but not in all areas
- Zero premium Medicare Advantage Plans are available but you must pay attention to copays, coinsurance and maximum out-of-pocket costs
- Original Medicare has higher monthly premium costs but its 20% coinsurance is predictable nationwide
- Medicare Advantage yearly limits on out-of-pocket costs add financial protection lacking in Original Medicare
- Supplemental insurance helps cover Original Medicare cost-sharing but adds another premium
- Your anticipated healthcare usage and changes in health status can alter comparative costs
- Medicare Advantage benefits and provider networks can change from year to year
The right Medicare option for you provides affordable, predictable costs given your likely care needs, health profile and budget. Take time to evaluate all these factors so you can maximize both your coverage and savings.
We’re Here to Help
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What is the difference between Medicare Advantage and Traditional Medicare?
Medicare Advantage Plans offer an alternative to Traditional Medicare. They include Medicare Parts A and B benefits, and often include Medicare Part D prescription drug coverage. Advantage Plans have a yearly limit on what you pay out-of-pocket for covered services.
Do Medicare Advantage Plans cover the same benefits as Original Medicare?
Medicare Advantage Plans must cover all services that Original Medicare covers. However, plans may also offer extra benefits that Original Medicare does not cover, like dental, vision or hearing.
Why do some people choose Medicare Advantage over Traditional Medicare?
Medicare Advantage Plans can offer lower costs than Original Medicare. They may have lower copays and deductibles. Plans may also provide extra benefits Traditional Medicare does not.
What are the costs of Medicare Advantage Plans compared to Traditional Medicare?
On average, Medicare payments per enrollee are higher for Medicare Advantage Plans relative to Traditional Medicare. However, costs to beneficiaries may be lower with Advantage Plans.
Q: Can I get supplemental coverage with Traditional Medicare?
Yes, you can purchase supplemental coverage – like Medicare Supplement insurance – to help pay costs that Traditional Medicare does not cover.
Do I have to pay a monthly premium for Medicare Advantage?
Most Medicare Advantage Plans charge a monthly premium in addition to the Medicare Part B premium. However, some plans have a $0 premium.