This article was first posted October 1, 2022.
The open enrollment period for Part C Medicare Advantage and Part D Drug Plans starts on October 15 and runs through December 7, 2022. If you're 64 or older, your residential mailbox is probably already overflowing with sales materials and your cellphone is running hot from the spam marketing calls.
The reason for all this attention is that Medicare Advantage tends to offer sales agents the highest commissions (up to a $750 commission on a new policy, and about half that in subsequent years if the policy stays in force.) You could build yourself a well-upholstered retirement annuity selling these things, if you were still able to sleep at night. [LOL]
The high commissions on Medicare Advantage are also the reason very few insurers offer low-commission/low-premium high-deductible Medigap Plan G. Why waste your time if they be "makin it rain" with Medicare Advantage?
Two years ago I outlined an analysis of my Medicare choices upon turning age 65 and several readers have asked if there is anything I'd change. I've been quite happy with traditional Medicare, a $44/month high deductible Medigap Plan G, and the cheapest Part D Drug Plan available in my zip code ($7.70/month in 2022). Price gouging in generic prescription drugs continues to be a problem with Part D insurers, so I'm using a GoodRx coupon and paying out-of-pocket when that's a discount to what the insurance company charges. That strategy saves me about $600/yr -- better to have that $600 in my pocket than the insurer's.
#1 -- Medicare Advantage "skims off" about 15% of the value of your annual Medicare benefit to fund "overhead, profit, and excessive executive compensation"
The actuarial value of your Medicare benefit averaged around $13,500/year in 2021. It varies a bit from state-to-state and county-to-county. Surprisingly, the lowest average Medicare spending is in the otherwise high-cost State of Hawaii. Unsurprisingly Alaska has the highest average costs with a rural population spread over a large frozen area that's hard to get to.
If you choose Medicare Advantage, the Centers for Medicare & Medicaid Services (CMS), transfers that average $13,500/year benefit to the private health insurer you select. In turn, the insurer is allowed to skim off up to 15% of that $13,500 in admin expenses (i.e., $2,025/yr) though in many urban areas competition may limit that skim rate to 12% or so. That 15% figure relates to the so-called Medical Loss Ratio or MLR. Medicare demands that Medicare Advantage insurers spend at least 85% of your benefit on actual medical services and no more than 15% on overhead & profit.
For 2021, traditional Medicare had program costs of $887.6 Billion, spent $839.3 Billion on actual medical services for its 63.8 million beneficiaries, and $10.8 Billion for administrative expenses. (See Page 12, 2022 Medicare Trustees Report). That's an admin cost of 1.2%.
What are you buying for that additional 13% or so in admin expenses for Medicare Advantage? Mostly you're funding aggressive marketing (and that $750 commission split between the sales agent and insurance broker who employes the agent), a for-profit bureaucracy designed to frustrate and delay your access to health care, and an ungodly level of excessive Executive Compensation. The table below compares the CEO compensation for the four largest Medicare Advantage insurers with the much more modest salary for the Administrator of the Center for Medicare & Medicaid Services (CMS) who is actually running a bigger organization with a much larger budget than any of the insurance CEOs.
There's no "free lunch" in finance. If you're paying more in for-profit insurance company bureaucracy and Executive Compensation, you're getting less in actual hospital, doctor, and other medical services. Also, since your Medicare Advantage insurer is getting a lump sum up front, any health care they deny to you is reflected directly in their bottom line. Their financial interest are directly opposed to yours.
#2 - The AARP gets over $1 billion per year in advertising and promotional fees, most of it from the health insurance industry. That's triple what the AARP collects in member dues. Who do they work for?
#3 - The "20% that Medicare doesn't cover" averages out to a lot less than 20% in most major illnesses.Health insurance agents have been very successful in scaring seniors with the "20% that Medicare doesn't cover." But as this medical doctor points out, the actual copays you'll owe under Medicare amount to about 3.5% of the Medicare reimbursement. Sure it's a 20% co-pay on a doctor's bill, but the copay on a $1 million hospital charge is capped at just $1,556 in 2022 for up to a 60-day stay-- that's not even 1%.
#4 - There's a lot of suspected for-profit insurance company fraud in Medicare Advantage
#5 - Your Congressman and Senators likely think Medicare Advantage is just wonderful
Nothing speaks to the bipartisan culture of corruption in Washington like the annual Congressional "oath of fealty" to their Medicare Advantage paymasters in the health insurance industry.
I'll leave it to the student to investigate how many of the Congressional signees are taking campaign contributions from the health insurance industry. [Hint: It's just about all of them -- and a few more who were too cowardly to sign the letter.]
Resources for additional information.
True Cost of Health Care, by David Belk MD
2020 Trustees Report on Medicare
Medicare Advantage Wikipedia
October – December 2020 Approved Medicare Supplement (Medigap) plan premiums (WA state)
National Association of Insurance Commissioners -- 2018 Medicare Supplement Loss Ratios
Comparing Medicare Supplement (Medigap) and Medicare Advantage plans
State Averages for the 2020 Medicare Advantage Monthly Capitation Payments
Medicare Advantage Plans Overbill Taxpayers By Billions Annually, Records Show
Proportion of branded versus generic drug prescriptions dispensed in the United States from 2005 to 2019
Adding an Out-of-Pocket Spending Limit to Traditional Medicare, Urban Institute (June, 6 2022)
Capping Medicare Beneficiary Part D Spending at $2,000, Urban Institute (March 2022)