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How Medicare Advantage Works

Page Reviewed / Updated - February 07, 2020

Written By: Richard Stockton

Seniors in the United States who are aged 65 and over generally get medical insurance through the federal Medicare program. This coverage pays the cost for hospitalizations and doctor care, as well as for prescription drugs and other benefits, such as medical transportation. Beneficiaries who are enrolled in Original Medicare typically get their costs paid directly by the government at the point of service, and coverage limits are in line with the program's maximums. Some seniors, however, opt to get their medical insurance coverage from a Medicare Advantage plan. Medicare Advantage plans are administered by private insurance companies that get paid a flat fee by Medicare on behalf of the seniors enrolled in the plan. These plans must meet the government's guidelines for what to cover and how much seniors must pay for care, but they are otherwise free to experiment with extra services and unique payment structures that may suit some seniors better than Original Medicare.

This guide explains what Medicare Advantage plans are and how they differ from Original Medicare. It goes over the services a typical Medicare Advantage plan covers, and those it does not. Costs are discussed, and helpful information is covered regarding timelines and enrollment requirements. Finally, this guide answers many commonly asked questions about Medicare Advantage plans in order to give a better picture of whether this type of coverage is right for you.

What Services Are Covered?

Original Medicare delivers coverage in several parts. Part A pays for inpatient care in a hospital, while Part B pays for outpatient care, usually at the doctor's office. Part D is a prescription drug benefit. Medicare Advantage plans all provide Part A coverage for beneficiaries, as well as Part B. All Medicare Advantage plans provide coverage for urgent and emergency care, as well as for care received outside of their normal coverage areas within the United States, though not overseas. Most Medicare Advantage plans also include extras, such as eyeglasses, prosthetic appliances and durable medical supplies. Many have a prescription drug benefit included. Plans vary in their structure and coverage options, but they are broadly divided into six basic types:

Health Maintenance Organization (HMO)

Medicare Advantage HMO plans operate like traditional HMOs, in that they typically keep your treatment within-network and require referrals to see a specialist. These plans generally only cover services provided by plan doctors, with outside care (excluding emergency and urgent care) authorized only by special request.

Preferred Provider Organization (PPO)

PPO plans have a list of in-network providers, just like HMOs, but they are more flexible about paying for care outside of the network. Beneficiaries who seek treatment outside of the preferred network generally pay more at the point of service, but you have more options than in an HMO, including the option to go straight to a specialist or get a test done without a referral from your primary doctor.

Private Fee-for-Service (PFFS)

PFFS plans operate much like Original Medicare, in that they cover services provided by any doctor or healthcare provider that accepts the plan's terms. The Medicare Advantage PFFS provider determines what the rates it pays will be, as well as how much of the cost must be covered by the person seeking care. Details of PFFS plans are subject to wide variation, even within a single insurance carrier, which may offer multiple plan options.

Special Needs Plans (SNPs)

SNPs are more of a niche plan than most Medicare Advantage plans. These options cover the special needs of people with specific medical conditions or treatment plans. SNPs often cover beneficiaries who have both Medicare and Medicaid, for example, as well as people who need long-term care in a nursing home or mental health facility. Special Needs plans do not cover hospice care, however, since Original Medicare always pays hospice costs, regardless of the type of Medicare Advantage plan you may have.

HMO Point-of-Service (HMOPOS)

HMOPOS plans are a special type of HMO coverage that allows out-of-network care more easily than a traditional HMO. These plans are generally preferred by beneficiaries who travel often, or who have unusual health needs that their local HMO may not be able to cover. HMOPOS plans generally charge a higher monthly premium for this flexibility, and the co-payments are generally higher than with the traditional model.

Medical Savings Account (MSA)

MSA plans are a kind of bank account that can be used only for medical expenses. When you enroll in a Medicare Advantage MSA plan, Medicare deposits money into your account to help you pay the generally high deductible. This money can be put toward the year's health expenses as a cash benefit. MSAs do not, as a matter of federal law, provide drug coverage. Beneficiaries who need help with prescription drug coverage must buy a separate Part D policy.

Medicare Advantage Plan Costs

Medicare Advantage monthly premiums for customers range from $0 to over $300, and each plan sets a different amount to be paid at the point of service as a copayment or deductible. One reason for this pricing structure is due to the way Medicare Advantage plans are funded by the federal government. When a company gets a Medicare Advantage plan approved by Original Medicare, it's paid a flat rate the government has calculated to cover its members' expenses for the year. If the insurance company is an HMO, or if it has contracts with a large network that can save it money on care, those savings result in a surplus that can be passed on to customers as a $0 monthly plan. In 2019, the average Medicare Advantage recipient paid $28 a month for Part C coverage, while the average Medicare Advantage Part D plan cost $29 a month.

Geographic area is another factor driving the cost of Medicare Advantage plans. Costs for care tend to be higher in more expensive states, or in the areas of states where the insurance company provides coverage. In these areas, the company might not save much money by negotiating lower rates for its beneficiaries, and so monthly premiums are likely to be higher. In 47 states, Medicare Advantage providers can also charge variable premiums based on individual factors, such as whether the beneficiary uses tobacco or has a less than ideal body mass index. Three states, Massachusetts, Minnesota and Wisconsin, don't allow this practice. Instead, insurers in these states must assign a group rate based entirely on the geographic area where coverage is provided, rather than adjusting prices based on personal information.

Eligibility and Enrollment Timelines

Seniors who expect to become eligible for Medicare coverage when they turn 65 have a 7-month enrollment period in which they can sign up for either Original Medicare Parts A and B, or choose a Medicare Advantage plan for their Part C. This period begins on the first day of the month three months before their 65th birthday, extends through their birth month and ends on the last day of the third month after their birthday. If, for example, a senior turns 65 on May 15, their enrollment period begins on February 1 of that year and ends on August 31. It's important to enroll in a plan as early as possible. Late enrollment in a Medicare Advantage plan may result in having to pay higher premiums as a penalty. Additionally, enrolling in a Part B plan during your birth month is likely to result in a 3-month delay for the benefits and a gap in coverage.

Open enrollment in Medicare Advantage plans begins each year on January 1 and ends on March 31. During this period, it's possible to change coverage plans without penalties, though the new coverage only goes into effect on July 1 of the year you changed plans. You can also change plans outside of this period in response to special circumstances. Special enrollment periods (SEPs) are available to people with group health plans from their employers or unions, or whose spouses have group coverage through their work that also covers them. You are considered to have entered an 8-month SEP when your group coverage ends, though this does not include COBRA, which is not considered coverage through work for Medicare enrollment purposes. Volunteers who are serving overseas also have an SEP when they return to the United States. There is usually no enrollment penalty for signing up during a SEP.

FAQs

Q: Who is eligible for a Medicare Advantage plan?

A: Any U.S. citizen who is eligible for Original Medicare is eligible to participate in a Medicare Advantage plan. Coverage varies by state, and not all insurers offer coverage in every area, but most parts of the United States are covered. Some states, such as Massachusetts, require that all health insurance companies operating in the state offer at least one Medicare Advantage plan.

Q: Can I be denied for a pre-existing condition?

A: No applicant who qualifies for Original Medicare can be denied coverage under a Medicare Advantage plan for a pre-existing condition. Seniors in 47 states may be charged more if the insurance company deems them to be a higher risk than other customers, but denials on this basis are not permitted.

Q: Does Medicare Advantage cover prescription drugs?

A: Many Medicare Advantage plans provide a prescription drug benefit as part of their coverage, though many seniors opt to buy their Part D separately to save money. Medicare Advantage plans that are structured as HMOs almost always include prescription coverage at in-network pharmacies.

Q: Do Medicare Advantage plans cover everything Original Medicare covers?

A: By law, a Medicare Advantage plan must offer all the Parts A and B coverage that a beneficiary would have gotten from Original Medicare. Medicare Advantage plans often bundle extra coverage together and structure their pricing in a variety of ways to better serve their customers. Traditional Part B coverage, for example, does not pay for new eyeglasses or assistive devices such as walkers and canes. Some Medicare Advantage plans, however, offer these and other benefits. Many also roll limited Part D coverage into the same basic plan, which can reduce the cost and complications seniors face when paying their monthly insurance bills.

Q: Do Medicare Advantage plans work with Medigap coverage?

A: Federal law doesn't allow beneficiaries to carry both Medigap and Medicare Advantage plans at the same time. To qualify for Medigap, beneficiaries must participate in Original Medicare.