Image source: Social Security Administration. 

For senior citizens, there may not be a more important entitlement program than Medicare. Even though it can be argued that the income received from Social Security is of more importance, it's very possible that your lifetime medical care costs under Medicare could dwarf your benefits received from Social Security.

Senior citizens have a big decision to make
However, the Medicare of today may look a lot different than the Medicare of your parents' generation. In 1995, a new type of plan was introduced that was designed to replace and build upon the original Medicare in order to give consumers (mostly seniors) additional choices. These private plans became known as Medicare Advantage plans.

Traditional Medicare encompasses two components: Part A, which is known as hospital insurance and rarely has a monthly premium attached, and Part B, which covers physician and outpatient services and does have a monthly premium. Medicare Advantage plans are known as Part C. These plans replace the original Medicare (meaning they cover Part A and Part B) and are run by private insurance companies as opposed to the federal government, which handles the management of Medicare. But, Medicare Advantage plans also typically come with more encompassing coverage options, including, but not limited to, vision, dental, and prescription drug coverage.

Image source: Social Security Administration.

On the surface, the biggest differences between the original Medicare and Medicare Advantage tends to be premium price and out-of-pocket costs. Although it's not always going to be the case, the more encompassing coverage offered by Medicare Advantage plans tends to lead to a higher monthly premium. This could certainly weigh in with the roughly 55 million consumers eligible for Medicare when they are choosing their plans.

However, there's also a trade-off. The normally lower premiums of government-sponsored original Medicare comes with no out-of-pocket spending limits. This means if you require treatment that costs tens or hundreds of thousands of dollars, you could be on the line for around 20% of coinsurance costs. With Medicare Advantage plans, there's an out-of-pocket annual limit regarding how much you'll have to pay. In 2015, the maximum out-of-pocket limit is $6,700, with HMOs and PPOs averaging out-of-pocket limits of $4,869, and $5,250, respectively.

Original Medicare versus Medicare Advantage -- which is better?
Original Medicare and Medicare Advantage each offer their own advantages and disadvantages -- so which one is truly better for seniors?


Image source: Medicare. 

According to a recently released study from J.D. Power, enrollees view Medicare Advantage plans as having significantly more value, and they tend to be considerably more satisfied than under the original Medicare.

J.D. Power's customer satisfaction study on Medicare Advantage versus Medicare plans ranked overall satisfaction on a scale of 1 to 1,000, and it broke down consumers' views into six categories, partitioned by importance. These categories were:

  • Coverage and benefits (24%)
  • Provider choice (18%)
  • Customer service (16%)
  • Information and communication (16%)
  • Cost (15%)
  • Claims processing (11%)

Overall, Medicare Advantage plans generated a satisfaction score of 774 compared to just 679 for original Medicare.

Why such a huge difference? Nearly half (46%) of all Medicare Advantage members believe that their health plan plays a critical role in their own health and wellness. In fact, around three-quarters of Medicare Advantage members note that their primary doctor and hospital weren't dropped from their plan over the past year, and the average doctor-member relationship via Medicare Advantage is a whopping 8.6 years. Not having to change primary care physicians (PCPs) often (if ever) more than likely allows a PCP to give a patient the highest quality care possible since they have a long-term medical history with the patient.

Image source: National Cancer Institute.

Medicare Advantage members also noted via J.D. Power's study that they wait an average of 7.7 days for an appointment with their PCP, compared to the 14.7-day wait time for government-sponsored Medicare.

Perhaps most importantly, and to quote the J.D. Power study: "Medicare Advantage members are more likely to completely understand how their plan works -- including annual deductibles, out-of-pocket expenses, and which doctors are covered -- than members of commercial plans."

The data appears to signal that Medicare Advantage and private insurance plans are the smarter way to go.

How do private insurers stack up within Medicare Advantage?
Considering the praise that Medicare Advantage plans received in J.D. Power's consumer satisfaction study, and the power of word of mouth for friends and family, the assumption is that Medicare Advantage is only going to gain steam as baby boomers move toward retirement. Given that, let's have a brief look at some of the top-performing insurers by customer satisfaction according to J.D. Power.

Leading the pack by a substantial amount is Kaiser Permanente with a satisfaction score of 842. The study notes that Kaiser Permanente performed well in five of six categories. I suspect its privately held status as a not-for-profit health solutions company gives consumers the added satisfaction of knowing that a large corporation isn't behind the scenes basking in members' premiums. This is a big reason why health cooperatives also tend to be popular and well-liked.


Image source: Centers for Disease Control and Prevention. 

Of the large, publicly traded Medicare Advantage providers, Humana (NYSE:HUM) performed around the average with a score of 759, but still better than most of its peers when it comes to customer satisfaction. This is great news for Humana as it generates north of 60% of its income from Medicare Advantage plans. UnitedHealth Group (NYSE:UNH), the nation's largest health-benefits provider, came in with a score of 752, fairly close to Humana. UnitedHealth nets about a quarter of its annual revenue from Medicare Advantage plans.

Even the lowest score among large Medicare Advantage plan providers is still well above the government-sponsored customer satisfaction average of 679. Anthem (NYSE:ANTM) ranked dead last in customer satisfaction in J.D. Power's study, but still managed to generate a score of 732 out of 1,000. Although Anthem's lower satisfaction score could lessen its Medicare Advantage growth rate, it's certainly nowhere near low enough where I would be concerned about it netting new members.

Ultimately, eligible individuals needs to examine their own situations to determine whether original Medicare or a Medicare Advantage plan is right for them. But, based on this recent data, don't be surprised if Medicare Advantage plans continue to gain steam.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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