Have you ever wondered why some Medicare Advantage Plans don’t have monthly premiums? If you have, you are not alone. Why an Advantage Plan with seemingly comprehensive benefits has a $0 monthly premium is one question that insurance agents are asked frequently.
Many people even wonder if a plan without a monthly premium is too good to be true. But once you understand the factors that go into determining a Medicare Advantage Plan’s premium, you’ll be able to make that determination yourself.
After learning what determines premiums, you’ll also see why a Medicare Advantage Plan’s monthly premium should not be the determining factor as to which plan you choose.
Plan benefits and administration costs primary determine the monthly premium
One feature that makes Medicare Advantage Plans attractive is choice. As long as plans include all Medicare Part A and Part B benefits, sponsors have the freedom to set premiums, determine cost-sharing amounts (deductibles, coinsurance and copayments) and include any extra benefits not covered by original Medicare.
Medicare pays a fixed amount each month to companies offering Medicare Advantage. These monthly payments are to cover:
- The cost of care you receive
- Administrative costs, including marketing, commissions and general overhead
A provision contained in ObamaCare legislation requires that 85% of revenue go toward the cost of care. This is known as the medical loss ratio.
Although administrative costs can vary from company to company, plan design is the primary determinant of what premium will be required. This includes cost-sharing amounts and benefits.
The two sides of plan design
One benefit of enrolling in a Medicare Advantage Plan is avoiding the out-of-pocket costs associated with original Medicare. Rather than paying a lump sum deductible for inpatient care, Advantage Plans often require a much smaller per day payment for a limited number of days, beyond which no further payment is required.
The 20% outpatient coinsurance amount required with original Medicare is probably the number one reason people consider a Medicare Advantage Plan or Medicare supplement. Medicare Advantage Plans typically compensate for the 20% by charging copays and coinsurance for defined services. For instance, an emergency room visit may require a $50 copay with lesser amounts required for primary care and specialists visits.
More costlier outpatient services like outpatient surgery, CAT scans and MRIs will often require you to pay a coinsurance amount or in some cases a larger copayment.
When you consider all the ways that a plan can be designed, its easy to see how the actual cost of using a plan is difficult to determine. An insurance company with availability to vast amounts of historical actuarial data can craft a plan that it believes will meet the 85% medical loss ratio and be attractive to potential members.
An insurance company with a large share of the Medicare Advantage market may have lower administrative costs due to the economy of scale and tweak cost-sharing amounts to offer a Medicare Advantage Plan without a monthly premium.
Another consideration that factors into what monthly premiums will be is the type and scope of benefits themselves. Plans sponsors have the freedom to include ancillary benefits including:
- Silver Sneaker gym membership
- Transportation to and from medical appointments
- Discounts on OTC items
All of these benefits have associated costs and plan design will have a major impact on premium amount. It’s also important to note that some $0 premium plans often include some of the extra benefits as optional. It’s common to pay a premium to get upgraded dental coverage with an Advantage Plan. In this way, the plan can still be presented as a $0 premium plan.
On benefit that has a major impact on the monthly premium is Part D coverage. Medicare Part D Plans can include an annual deductible, which will allow for a lower monthly premium. Although for Part D, deductibles have not been as common with stand-alone Part D Plans, they are a possibility.
The Part D formulary, which is the list of covered drugs, is a major determinant of monthly premiums. Seldom will you find a Medicare Advantage Plan with an enhanced Part D formulary. From a benefits point of view, the Part D formulary may have the biggest impact on monthly premiums. And don’t forget that all the cost-sharing amounts for the Part D portion of coverage can be manipulated to ultimately affect the premium.
How important is the Medicare Advantage Plan premium?
On the surface, for most people, the Medicare Advantage Plan premium is a big concern. After all, you have to fit it into your healthcare budget. But when you really think about it, there are so many moving parts, that the premium becomes less important when you look at overall annual costs. The exception of course, is if you rarely use your plan.