Understanding Medicare Advantage Plans: Max Out-of-Pocket vs. Deductible vs. Co-Pay

If you’re about to retire or planning for your retirement, you might be considering a Medicare Advantage plan. These are private health plans offered by national and region health insurance companies and healthcare providers. They are similar to Obamacare plans and health coverage you get through your employers, but some features and terminology are a bit different. In this MedicareWire article, we’ll break down all of the various terms and costs associate with Medicare Advantage to give you a better understanding of how they work.

Medicare.gov does a nice job breaking down Medicare benefits into neat grids. They even show a calculation of what you should expect to pay annually if you enroll in a particular health plan. Even so, it’s up to you to understand the difference between deductibles, premiums, maximum out-of-pocket limits, co-pays, and co-insurance so you’ll know what you will actually pay when you use healthcare services. 

Planning Ahead

It’s important to be prepared for your share of the doctor’s bill, but it’s particularly important to understand this stuff when shopping for a new Medicare Advantage plan or a Medicare prescription drug plan.  In order to compare plans, you must understand how they are priced and your share of the bill when you use healthcare services.

Medicare Advantage Health Insurance Terminology

There are several Medicare insurance terms that are important to understand:

• Premium: The monthly fees you pay for your health insurance.
• Deductible: How much you must pay first, before the insurer pays.
• Co-pay: A fixed dollar amount that you pay for medications, services, or seeing your doctor.
• Co-insurance: Similar to a co-pay, however, co-insurance is a percentage of the cost.
• Maximum Out-of-Pocket (MOOP): The absolute maximum you’ll pay for inpatient and outpatient care annually, excluding premiums and deductibles.
• Initial Coverage Limit (ICL): Specific to Part D coverage, ICL is the amount paid by both you and the insurer for your medications before you hit the dreaded donut hole (coverage gap).
• Coverage Gap: The phase of a Part D plan when you pay all costs for your prescriptions.

Let’s discuss these factors in a bit more detail.

Monthly Premium

There’s no getting around it, Medicare Advantage premiums are complicated. The reason for the complication is because there isn’t a single premium, there are four:

1. Part A Premium (inpatient coverage): Most people don’t pay a monthly premium for Part A. If you buy Part A, because you didn’t work, you’ll pay up to $411 each month.
2. Part B Premium (medical coverage): Most people pay $104.90 each month. If you’re a higher income earner, you’ll pay more.
3. Part C Premium (Medicare Advantage): The Part C monthly premium varies by plan.
4. Part D Premium (prescription drug coverage): The Part D monthly premium varies by plan (higher-income consumers may pay more).

If you have shopped for a Medicare Advantage plan (Part C) in the past, you already know that some have a zero dollar ($0.00) premium, while others have a premium up to about $500.00 per month. This is the amount above and beyond your monthly Medicare Part B premium that you will pay to join a plan.

This might seem confusing at first. However, it’s done this way because Medicare pays the plan between $700 and $800 per month (on average), for each beneficiary that joins. The amount is variable because Medicare pays more for higher quality plans. A zero dollar plan is simply one that is able to provide the health insurance coverage offered for the monthly amount it receives from the government.

To further complicate matters, some Medicare Advantage plans include Part D coverage for your prescription drugs, and some don’t. If it includes Part D, the monthly premium for this coverage is included.

Deductibles

Most Medicare Advantage plans do not have a deductible for the Part B (medical) portion of the insurance. If you are accustomed to employer or Obamacare health insurance, this will be a welcome change for you.

Many plans do have deductibles when you use Part A (inpatient) services. However, these deductibles cannot be more than what you’d pay with Original Medicare:

• $1,288 deductible for each benefit period
• Days 1-60: $0 coinsurance for each benefit period
• Days 61-90: $322 coinsurance per day of each benefit period
• Days 91 and beyond: $644 coinsurance per each “lifetime reserve day” after day 90 for each benefit period (up to 60 days over your lifetime)
• Beyond lifetime reserve days: all costs

In most cases, plans deductibles are significantly less than what Original Medicare allows.

Co-Payments and Coinsurance

How a plan structures its Part B co-payments and coinsurance makes a huge difference in what you’ll pay each year when you see the doctor or use other heath services. A co-payment is a fixed amount fee that you pay every time you see a doctor, get lab tests, or use other medical services. Fees vary from service to service. Unlike the fixed amount you’ll be charged for a co-pay, a co-insurance hits you with a percentage of the cost. The maximum coinsurance for any service is 20%, just like Original Medicare.

In general, we like co-pays better than co-insurance. It’s more predictable and it make comparing plans easier.

Maximum Out-of-Pocket (MOOP)

Unlike Original Medicare, Medicare Advantage has a safety net system. It’s the annual Maximum Out-of-Pocket limit, or MOOP. Plans may use the standard MOOP set by Medicare annually ($6,700 in 2020) or and alternative lower amount.

This is an important number, particularly if you visit the doctor frequently for a chronic condition. When you reach the MOOP amount in annual deductibles, co-payments and coinsurance, you won’t pay any more out-of-pocket for the remainder of the year.

It’s important to note that the MOOP amount does not include your monthly premiums or what you pay for prescriptions (Part D).  MOOP only applies to the healthcare (Part C) portion of your plan.

Part D Coverage for Prescriptions

Without a doubt, the most confusing and frustrating of all health insurances is Medicare Part D. It’s confusing because its a cost sharing system with four phases:

1. The “Deductible” Phase: If a Part D plan has a deductible, you pay the full price for your prescriptions until you’ve spent the amount of the deductible.
2. The “Initial Coverage Limit” (ICL) Phase: Once your deductible is met, you start the ICL phase. In this phase you and the insurer share the cost of your prescriptions based on the plan’s formulary. All covered medication fall into a price tier in the formulary. You pay the amount specified in the price tier until you and the insurer have spent the annual ICL ($3,310 in 2016).
3. The “Gap Coverage” Phase: Once you and the insurer have reached the ICL, you fall into the dreaded donut hole coverage gap. While in the coverage gap, you’ll pay 45% of the plan’s cost for brand-name drugs and 58% of the plan’s cost for generic drugs in 2016. You’re out of the coverage gap once your yearly out-of-pocket drug costs reach $4,850 in 2016.
4. The “Catastrophic Coverage” Phase: If you reach the catastrophic coverage phase, you’ll only pay a small co-payment or coinsurance for covered prescription drugs for the remainder of the year.

The following costs count towards getting you out of the donut hole ($4,850 in 2016):

1. The annual deductible
2. Co-payments and coinsurance costs spent by you and the plan during the initial coverage phase
3. Co-payments and coinsurance spent by you in the coverage gap (In 2016, this is 45% of the plan’s cost for brand-name drugs and 58% of the plan’s cost for generic drugs)
4. The 50% manufacturer discount for brand-name drugs

Wrapping Up

There’s no escaping it, Medicare has a lot of moving parts. What you pay won’t be the same as what your spouse or neighbor pays. Your costs in a Medicare Advantage Plan depend on:

• Whether the plan charges a monthly premium.
• Whether the plan pays any of your monthly Medicare Part B (Medical Insurance) premium.
• Whether the plan has a yearly deductible or any additional deductibles.
• How much you pay for each visit or service (co-payment or coinsurance).
• The type of health care services you need and how often you get them.
• Whether you go to a doctor or supplier who accepts assignment (if you’re in a PPO, PFFS, or MSA plan and you go out-of-network).
• Whether you follow the plan’s rules, like using network providers.
• Whether you need extra benefits and if the plan charges for it.
• The plan’s yearly limit on your out-of-pocket costs for all medical services.
• Whether you have Medicaid or get help from your state.

The more you bone up on the terminology, the better prepared you will be to make smart decisions about your plan choices.