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What You Need to Know About Medicare: Medicare Advantage

Medicare Advantage is a private health insurance plan that replaces Medicare and can be setup as an HMO, PPO, Private Fee for Service Plan, or Special Needs Plan and usually combines some of the benefits of Medicare Parts A, B, and D. If you have a Medicare Advantage plan, also known as Medicare Choice or Medicare Part C, you can’t be sold a Medigap policy, and if you move from a Medigap plan to an Advantage plan you may lose the Medigap plan permanently.

Because this type of plan replaces Medicare, Medicare has agreed to pay a part of the premiums every month for any member who elects this type of plan. You can join anytime during your initial enrollment period at age 65. After your initial enrollment period, you can change your coverage twice per year. Between October 15 and December 7 each year you can make any changes you would like. Between January 1 and February 14 you can make some changes, but your flexibility in changing plans is restricted as you can’t:

  • Switch from original Medicare to Medicare Advantage.
  • Switch to a different Medicare Advantage plan.
  • Switch Medicare Prescription Drug Plans.
  • Join, switch, or drop a Medicare Medical Savings Account plan.

You may be able to make changes at times after the enrollment periods if one of the following applies:

  • You move out of your plan’s service area.
  • You qualify for extra help.
  • You live in a nursing home. 

Keep in mind that these plans are heavily sold and have a high internal overhead cost, so it is important to very closely scrutinize any Medicare Advantage plan before electing to go that route. A high percentage of Medicare Advantage enrollees are underprivileged seniors who enrolled in lower-rated plans to save on upfront costs without accounting for coverage levels, restrictions on the network of care providers, and out-of-pocket costs.

Attrition rates for Medicare Advantage plans range from 0% to 66% per year, with an average of 10% yearly attrition and a 7% rate of yearly attrition for those 85 and older, according to a 2016 study. This is not to say that Medicare Advantage plans are to be avoided, just carefully scrutinized. Remember, a doctor can choose to stop accepting Medicare Advantage at any time and Medigap does not have to accept an applicant after the initial enrollment period.

Types of Plans

Health Maintenance Organization (HMO) plans generally require you to get non-emergency health care and services from doctors or hospitals in the plan’s network. If you are enrolled in an HMO plan, you will usually have to go to your primary care physician to get a referral so you can see a specialist. You may also have to get plan approval before receiving certain services or treatments. If your doctor leaves the plan, you will have to choose another plan doctor or pay full cost for all services performed by your out-of-network doctor. 

Preferred Provider Organization (PPO) plans have a network of providers but will generally allow you to receive care from out-of-network doctors and hospitals at a higher cost. You do not have to choose a primary care physician and you do not have to have a referral to see a specialist (although some specialists will require a referral to treat you).   Depending on where you live you may be able to purchase a regional plan based on one of Medicare’s 26 regions or you may be able to purchase a local PPO plan focused on serving your local area.

Private Fee-for-Service (PFFS) plans allow you to visit any doctor or hospital that accepts the plan’s payment terms and agrees to treat you. A doctor or hospital can decide not to accept the plan’s payment terms at any time and refuse to treat you even if they have treated you in the past. This means that you have to present a current enrollment card before each visit or service to make sure that the doctor or hospital will accept your PFFS plan for that visit. Because a doctor may not charge you more than the payment terms, which can be lower than the Medicare rate for the same service, some doctors choose not to accept PFFS plans.

Special Needs Plans (SNPs) generally require you to get non-emergency health care and services from doctors or hospitals in the plan’s network. Enrollees generally have to go to their primary care physician to get a referral to see a specialist. SNPs are generally limited to people who live in nursing homes or who require nursing care at home, people who are eligible for both Medicare and Medicaid, or people who have specific chronic, severe, or disabling conditions. They are specifically designed to improve coordination and continuity of care for vulnerable groups with special needs that are challenging and costly to treat.

Benefits

Medicare Advantage plan coverage can vary widely, as they do not have to cover every benefit in the same way. This means that some plans may pay more than or less than Medicare would normally pay. Plans can offer dental coverage, vision coverage, out-of-pocket spending limits, and other services not normally covered by Medicare. Be sure to fully consider any Medicare Advantage election because you may be limited to using a specific network of providers and may be required to get extra permissions or pay additional fees for services provided out of network.

Medicare Medical Savings Account Plan

The Medicare Medical Savings Account Plan is a type of Medicare Advantage plan available in certain areas that pairs a high-deductible Medicare Advantage plan with a medical savings account. The general details about Medicare Medical Savings Account Plans are as follows:

  • The medical savings account is tax-free if used for qualified medical expenses (there are taxes and penalties on funds used for non-qualified expenses) and is solely funded by a yearly contribution from the Medicare Advantage plan.
  • Any funds left in the medical savings account at the end of the year can be carried over to the next year.  
  • The deductible and yearly account contribution vary by plan, but the contribution will always be much lower than the deductible and you cannot contribute any money to the medical savings account.  
  • This type of plan differs from the standard Medicare Advantage plan in that you have to continue paying for Medicare Part B and you may keep a preexisting Medigap policy if you choose. (Medigap policies are not permitted to cover any of the deductibles.)  
  • If you choose a plan with benefits not normally covered by Medicare, you will pay extra for the coverage beyond what is normally covered by Medicare.

You are not eligible for a Medicare Medical Savings Account if any of the following apply:

  • You have outside health coverage that would cover the Medicare Advantage deductible.
  • You get benefits through the Department of Defense (TRICARE) or the Department of Veterans Affairs (VA).
  • You are a retired federal government employee and part of the Federal Employee Health Benefits Program (FEHBP).
  • You are eligible for Medicaid.
  • You have end-stage renal disease unless you are a former Medicare Advantage enrollee that left the Medicare program and you haven’t yet joined another Medicare Advantage Plan.
  • You are currently receiving hospice care.
  • You live outside the United States more than 183 days a year. 

Structuring Income for Medicare Purposes

The fact that there are different levels of premiums established and clearly delineated tiers allows for a planning opportunity. You should look at each year’s income and the ones ahead while working with your financial advisor and your accountant not only for income tax purposes but also because the difference in Medicare Part B and Part D levels can add up to $5,202 per year per person.

Obviously, most people won’t be swinging from the very bottom to the very top rates, but the change in price points for a structure that delays your move up through the price points over your life can save significant sums of money. There are generally two ways you can reduce your Medicare costs, decrease income, or increase tax deductions. It’s important to communicate with both your financial advisor and accountant to make sure the coordinated effort is well thought through and executed.

Here are some things you can consider to better structure your income in any given year or years ahead:

  • After you turn age 72, you will need to begin taking the required minimum distributions from your retirement accounts. These distributions will be taxed at ordinary income tax rates just like you earned the money from working and will be based on a calculation that dictates what percentage of your total retirement assets must be distributed in any given year. Every year that goes by, the distribution percentage of your IRA account increases. This means that the older you get, the larger your distributions are likely to become, which can force you into ever-increasing tax brackets and Medicare brackets. Converting some of your retirement money to a Roth IRA, having your charitable donations come from your IRA, or having a prorated amount of your financial planning fees come from your retirement account rather than have your taxable account pay for all your planning fees can all have the effect of reducing the amount of your required minimum distribution both now and in the future. Therefore, you can either increase the amount of time until you step up into a new bracket or avoid a new and higher bracket altogether.
  • You can delay Social Security to save it from being taxed at a higher rate before you turn full retirement age. This will potentially allow you to perform Roth conversions up to the top of your current tax or Medicare bracket every year if the modeling suggests you might move up in tax or Medicare brackets later in life.
  • Be careful about putting in extra hours at work if the pay will take you over a tax or Medicare bracket. You could end up taking home less after taxes and Medicare fees for having worked more (in effect having you pay to work).
  • Be strategic in the way you realize capital gains and losses.
  • Be strategic about pulling money from your Roth or traditional IRA so that if you are nearing the top of your tax bracket or the next tier of Medicare premiums, you may decide to take some money out of your Roth rather than your IRA to avoid a significant increase in expenses for the year.
  • You may decide to delay taking your pension or annuity benefits, if this makes sense, to avoid higher taxes and Medicare expenses.
  • It may make sense to potentially front-load deductible medical expenses if you are over the medical deduction floor for the year and it makes sense to front-load the expense in order to keep your income lower for taxes and Medicare expense purposes. The same goes for charitable donations that are deductible. While often you may choose to have the charitable donations come from your IRA rather than a taxable account (as a long-term strategy), in some years it may help to take the deduction and end up in a lower Medicare and tax bracket situation.

You may want to increase or maximize any deductible retirement plan contributions you may be eligible to make to bring down your taxable income.

Potentially lower-income Medicare is based on petitioning the Medicare office if you find yourself in one of these situations:

  • You have amended your tax return and it changes the income used to determine in the monthly adjusted amounts.
  • You have married, divorced, or became widowed.
  • You or your spouse lost income-producing property because of natural disasters or other events beyond your scope of control.
  • You or your spouse experienced a change in an employer’s pension plan.
  • You or your spouse received a settlement from an employer or former employer because they reorganized, went bankrupt, or ran out of business.

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