Medicare
Image: Medicare.gov.

Medicare covers most Americans once they turn 65, and it includes a wide variety of different choices. You can use traditional Medicare hospital and medical coverage in combination with a prescription drug plan and Medicare supplemental insurance, or you can use private Medicare Advantage coverage that often wraps all those benefits into a single package. What you'll find when you start looking at plans, though, is that there are many to choose from. To help you pick the best plan, Medicare has introduced ratings that let you compare your options. A simple five-star rating system might sound like a great way to narrow down your options, but it's essential to understand how a plan earns its stars. Let's take a look at the Medicare ratings system and how you can find out if you have the plan that best suits your needs.

The Medicare rating: It's all in the stars 
Medicare's rating system is designed to make comparing plans easier. The ratings are on a scale of one to five stars, with one star being poor while five stars represent excellent plans. Not only does Medicare use the star system to help its users, but it also bases some of its payouts on the ratings, with those plans that receive four or five stars becoming eligible for possible bonus payments.

How a plan earns its stars depends on whether it's a Medicare Advantage plan that provides basic health services, or a specialized prescription drug plan that focuses on drug services. For health-services plans, Medicare looks at five general categories: how well a plan does at helping patients stay healthy, how it deals with patients with chronic health conditions, how satisfied members are with the plan, how many complaints a plan receives and how its performance has changed over time, and how the plan addresses appeals from its customers.

For drug plans, a similar but slightly different set of four criteria applies. Medicare looks at safety measures and how well the plan provider does at estimating pricing. It also looks at how satisfied customers are with the service, as well as complaints and plan performance and how well the plan handles customer appeals.

Within each of these categories, a variety of factors helps determine what the plan's score will be. For instance, with respect to customer service, plans have to demonstrate that they treat patients fairly, efficiently, and in a timely fashion in order to earn the highest ratings. Medicare also tends to look at issues that can have a more dramatic impact on overall health in the future. For example, making sure that a drug plan takes steps to ensure its patients take medication for chronic conditions like diabetes, high blood pressure, or high cholesterol not only helps those patients now but can also help prevent a worsening in their condition in future years.

Medicare's assessment is also in line with the healthcare profession's increasing emphasis on trying to detect problematic situations early before they blossom into worse maladies. For example, the star rating incorporates the percentage of members who have had key age-appropriate screenings for high-risk conditions like colon cancer or heart disease, as well as monitoring weight and distributing flu vaccines prior to the high flu season.

Finally, Medicare puts a lot of weight on whether other members vote with their feet, either by sticking with their current plan or by defecting to a different plan. The rating system correctly looks only at those patients who choose to leave a plan, not counting those who move to a different geographical area and therefore don't have the same type of coverage available to them. Combined with the number of customer complaints and how a plan handles them, Medicare's assessment rewards those plans that treat their members well.

Should you switch to a five-star plan?
Five-star plans are relatively rare, with just 16 Medicare Advantage plans earning that distinction for 2015. That represents just a small fraction of all available Medicare Advantage plans, and the reward that Medicare Advantage participants have is that they can take advantage of special enrollment periods to join a five-year plan rather than waiting for the traditional open-enrollment period for Medicare.

It's important to understand that while highly rated plans do a good overall job of working with their customers, they might not always meet all of your individual needs. Coverage options can often be the key financial aspect of choosing a plan, and it might be worth accepting slightly worse customer service in order to get more of your healthcare expenses paid.

Nevertheless, Medicare ratings are intended to spur competition among plans, and plan providers take them very seriously. By choosing highly rated plans whenever they're available, you'll give the best plans the positive feedback they need to succeed and thrive.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.