This alternative to traditional Medicare is often misunderstood, but it may give you more flexible options for your healthcare in retirement.
Jan 10, 2015 at 7:01AM
As millions of Baby Boomers retire, they'll need to address how to finance their healthcare needs. Most Americans become eligible for Medicare coverage at age 65, and traditional Medicare covers many important healthcare services, including hospital stays, doctor visits, and prescription drugs. But another option that most retirees have is to choose a Medicare Advantage plan, also referred to as Medicare Part C. Although Medicare Advantage plans cover most of the same services as traditional Medicare, how the plans work is slightly different from what those covered under Medicare's regular Part A and Part B plans. Let's take a closer look at Medicare Advantage plans with the goal of helping you decide whether they're the best choice for you and your healthcare needs.
What are Medicare Advantage plans?
Unlike traditional Medicare, you get access to Medicare Advantage plans through private insurance companies that have contracts with Medicare. UnitedHealth Group (NYSE:UNH ). Humana (NYSE:HUM ). and Anthem (NYSE:ANTM ) are just a few of the many insurance companies that offer Medicare Advantage plans. Essentially, the insurance company agrees to provide all of the ordinary benefits under Part A hospital and inpatient coverage and Part B outpatient care, and in exchange, you may pay additional premiums to the insurer in addition to what you pay Medicare directly for regular Part A and Part B premiums.
Medicare Advantage plans are diverse in the way they structure their benefits. Some plans use the health-maintenance organization model, under which you have to visit hospitals and doctors within a defined network except in emergencies. HMO plans also typically use the hub-and-spoke model of primary care physicians, whom you have to visit first to get referrals to specialists. Other plans are structured as preferred provider organizations, where you don't have to visit in-network facilities and physicians, but you'll get preferential pricing if you do. Still other Medicare Advantage plans use fee-for-service arrangements whereby participating physicians and hospitals agree to accept the plan's defined payment terms.
Often, Medicare Advantage plans offer prescription drug coverage as part of their overall insurance package. If a particular plan doesn't have drug coverage, though, you can use Medicare Part D to cover prescription costs.
What's the process of getting into a Medicare Advantage plan?
Participants generally can join Medicare Advantage plans as long as they're eligible for Medicare and they live in the geographical area under which the given plan provides services. The main listed exception is for those who have regular needs for dialysis due to permanent kidney failure.
To enroll in a Medicare Advantage plan, you generally have to act during the established enrollment periods. For those who first become eligible for Medicare, the initial enrollment period runs from three months before you turn 65 to three months after your 65th birthday. After that, yearly enrollment periods run from October 15 to December 7, during which you can switch between various Medicare Advantage plans or move to or from original Medicare coverage. In addition, between Jan. 1 and Feb. 14, a special Medicare Advantage Disenrollment Period lets you go back to original Medicare.
The enrollment process is relatively straightforward. Medicare provides an online tool to help you find a plan, and then you can either enroll online at the insurer's website or complete a paper application form and return it to the plan provider.
Is Medicare Advantage better than original Medicare?
Medicare Advantage plans cover everything that original Medicare does, but they can also include additional coverage. Medicare Advantage plans can also impose different copayments, deductibles, and other charges than original Medicare, meaning that you can't simply compare monthly premiums in making your decision. But on the plus side, most Medicare Advantage plans put a cap on maximum annual out-of-pocket costs, something that original Medicare doesn't do.
Source: 401(K) 2013 on Flickr.
One big benefit of Medicare Advantage plans, though, is that you can choose particular plans that are tailored to your own individual needs. If a plan offers better benefits for a specific treatment, it might be perfect for you and greatly reduce the total amount you have to pay for healthcare. Moreover, given the flexibility in being able to switch plans, doing the legwork to find your best option every year can result in substantial savings.
In addition, some Medicare Advantage plans offer extra benefits like wellness programs or vision coverage. Wellness programs can not only improve your health but also cut the insurance company's costs for more serious ailments, which is why many insurers find such programs to be cost-effective.
Finally, Medicare Advantage plans can be simpler to understand than combining original Medicare with a Medicare Supplemental Insurance policy, also known as Medigap coverage. The total cost can also be a lot less, as some insurers offer preferential pricing to get the entire coverage package rather than just offering supplemental insurance under original Medicare.
Medicare Advantage plans are definitely worth looking at as part of your financial planning for your healthcare in retirement. If you're one of the millions of people approaching retirement, understanding your options will help you make the best choice possible for your healthcare needs.
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Anthem and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .