We’ve been doing a series called “Avoiding Medicare Mistakes.” Today, the mistake we’re going to address (and teach you how to avoid) is this: focusing on monthly premiums alone.
We all love a good bargain, right? We like to get the best deal and the greatest value for our dollar. In fact, when many of us need to fill up our cars, we always choose one gas station over the other because they offer a few cents less per gallon. Can you relate?
While it’s true we all love to save a little money, shopping for the best “bargain” (in other words, the lowest premium) is a big mistake when it comes to choosing a Medicare plan. Of course, the premium price is one of the factors you should consider when buying a plan, but monthly premiums alone should never be your primary decision-maker. Let us explain why.
Supplemental Plan
When you go on Medicare, you may decide to get a Supplemental plan. Now, if you go this route, there are several things you’ll need to understand about Supplemental premiums.
Initial Premium
First, you’ll have the initial premium. This is the premium you pay when you first start the plan. Initial premiums are based on your zip code or county, your age, gender, and often your tobacco status. But here’s the thing many people don’t realize about the initial premiums, they are only initial costs. Meaning, some people base their decision on initial costs alone, not realizing that even though they went with a company that offers a lower premium initially, those premiums may increase rapidly over time.
Some companies use this to their advantage. They’ll come in with a lowball initial price, fully intending on raising that premium once the claims start rolling in.
But even if the company isn’t intentionally misleading people, they will still raise their premium rates. All companies do this. This means you can’t make a decision based on the initial premium alone.
Premium Increases
There are a few different types of premium increases you need to be aware of. First, age-based premium increases occur every year in most states. Typically these increases are moderate and occur once a year on your policy anniversary.
The second increase is the group increase and it is more concerning. Group increases are not necessarily going to happen every year. They are, instead, based on how the group is doing financially. What do we mean?
When you buy a Supplemental plan, you’re placed in a group of thousands of policyholders. All the policyholders in the group pay the premium just like you. The insurance company processes claims by paying money (supplied by the premiums) out to providers. So there’s money going into the group (premiums) and money going out (claims).
Now sometimes, more money will go out of the group than money coming in. When this happens, the company has the right to increase the group’s premiums. Group increases typically have to be approved by the state insurance commissioner.
Here’s what you need to know: There are some companies that tend to request group increases more frequently than other companies. Which takes us to our next point, the stability of the rate.
Rate Stability
The stability of your rate is usually determined by the size of the group you’re in. Why is this? The larger the group, the more people paying into the group. And with more people paying into the group, the less individual claims are going to negatively affect the group rate.
This is why we as a firm typically avoid using regional supplemental companies because they don’t have large enough groups to ensure rate stability. Instead, we prefer to direct clients towards national-based companies because their size helps keep rates stable.
As you can see, premium alone does not decide your long-term costs. Instead, rate increases and the size of the company all help determine what you’ll be paying for your coverage.
Prescription Drug Plans
The second type of coverage we want to look at is prescription drug plans. Prescription drug plan premiums vary throughout the country right now. Some plans start around $13 a month, while others are in the $75 a month range.
There are two different factors that determine drug plan premiums.
Pharmacies
First, you have to realize that pharmacies are going to vary. Every drug plan identifies one or two pharmacies, and then they’ll offer you something we call preferred pricing on those two pharmacies. All the other pharmacies in that particular plan are going to be standard price pharmacies.
So let’s say you’re on a plan that’s $13 or less each month. The low premium sounds great, right? Well, the truth is, there may be only one or two pharmacies you can go to to get that low pricing. If you already have a pharmacy you like, chances are that pharmacy is standard, meaning even though you are paying less on the premium, you’re paying more at the pharmacy.
Our goal as a company is to find out where you will get your prescription filled, then try to find a plan that will offer preferred pricing at that pharmacy. That way you get the best prices in both premiums as well as co-pays at the pharmacy.
Formulary
The second factor that determines your drug plan premium is the formulary (a list of prescription drugs covered by your health plan). Prescription drug plans with low premiums typically have about 3,000 medications to choose from, while premiums in the mid-range usually offer around 5,000 different medications. Premiums in the high range typically offer formularies with a selection of around 7,000 different medications.
So if you take a lot of medications (i.e. you need a large formulary), but you’re on a plan that only offers a small selection of medications, then you’ll end up paying more out of pocket in co-pays at the pharmacy. In other words, even though your Rx premiums may be low each month, you may end up making up for it in pharmacy co-pays.
So keep in mind, the pharmacy and the formulary–not just the monthly premium–is what you need to consider when buying a drug plan.
Advantage Plans
The third type of plan we’ll look at today is the Advantage plan. Advantage plans oftentimes offer zero or very low monthly premiums. The highest you typically will pay for an Advantage plan premium is around $49 a month. But once again, this premium is not the main thing you should look at when deciding which Advantage plan to go with.
Networks
The first reason why premiums should not be the determining factor when it comes to picking an Advantage plan is because of the network system. Advantage plans have two different networks, HMO and PPO.
HMO networks are always smaller, with fewer hospitals, fewer doctors, and fewer specialists to choose from. PPO networks, on the other hand, are always much larger and offer more health provider options.
So while you may be offered a zero-premium Advantage plan, you may not be able to go to your preferred doctor, specialist, or hospital if it is an HMO network plan. You may have to pay $30 or more to get a PPO network plan, but in the end, it will be the best choice since you’ll get to stick with your doctor and have many more health care provider options available to you. So once again, premium alone should not determine which Advantage plan you go with.
Medical Co-Pays
Another factor to consider is medical co-pays. You could be on a zero-premium Advantage plan, but it might cost you $50 to see a specialist. On the other hand, if you choose a $19 a month plan, you’re paying more in premiums, but less in co-pays, meaning you might see your specialist for just $25.
In the end, you have to decide if it’s better for you to pay a little more in premiums so you can see your providers at less cost, or pay less in monthly premiums and more for your doctor visits.
Embedded Drug Plan
Oftentimes, Advantage plans have drug plans embedded in them. And while some zero monthly premium plans offer decent drug plan options, you can typically get a much better drug plan (covering more prescription drugs) by paying a little extra in your plan’s monthly premium. Again, you need to look at much more than just your monthly premium costs when deciding which Advantage plan to go with.
Max Out of Pocket
Max out of pocket simply means the maximum amount you’ll be required to spend in a year. This max out of pocket amount varies between Advantage plans. Sometimes the max out of pocket is in the $3,400 range while others are around $7,000. Again, this is the max amount you will have to spend out of your own pocket for the whole year.
If you have a low monthly premium Advantage plan, you typically have a higher max out of pocket, while if you pay a little more on monthly premiums, your max out pocket amount will usually be much lower.
Conclusion
Whether you’re deciding on which Supplemental, Prescription, or Advantage plan to go with, never focus solely on the premium monthly amounts. While premiums are certainly an important factor, there are other crucial components you’ll need to consider like rate stability, formulary size, and network options.
We understand how difficult making the right Medicare decisions can be. To take the next step, watch our full course here, or schedule a free one-on-one call with a certified Medicare School Guide who can answer your questions, compare plans options, and even help you enroll. Click here to get started.