Image source: Flickr user Steven Pisano. 

When it comes to entitlement programs for our nation's seniors, perhaps none is more important than Medicare. Although Social Security provides an immediate financial foundation that can allow seniors to cover their day-to-day living expenses during their golden years, without Medicare the costs of medical care could potentially outweigh the cumulative benefits received from Social Security over one's lifetime.

A Medicare revolution is under way
However, Medicare, the program designed to cover approximately 80% of seniors' eligible medical costs, may not be the preferred solution for millions of Americans. Although Medicare takes care of a substantial chunk of later-in-life medical expenses, it still leaves seniors on the line for the remaining 20%. Unlike standard insurance policies that have out-of-pocket annual limits, there is no limit when it comes to Medicare. This means that as cancer treatment costs increase, for example, the potential cost burden on seniors is growing as well.

Thus was born the Medicare Advantage plan. Medicare Advantage is designed to replace original Medicare by providing the same benefits, while also allowing seniors to bolt on additional protections. For instance, Part A, commonly known as hospital insurance, and Part B, which covers outpatient services and clinic visits, are all covered by Medicare Advantage plans, with safeguards in place to ensure certain services don't cost any more than they do under the original Medicare.

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What's different is that Medicare Advantage plans offer annual out-of-pocket limits (capped at $6,700 in 2016), as well as the opportunity to add prescription drug coverage. As you might imagine, the more you add, the more the plans typically cost in terms of premium -- the higher the premium, the lower the out-of-pocket costs tend to be, which can substantially reduce one's chances of being surprised by medical costs.

The numbers certainly don't lie: Medicare Advantage plan membership more than doubled among eligible Americans, according to the Centers for Medicare and Medicaid Services, between 2005 and 2015, going from 13% to 30%. Seniors really seem to be latching onto the extra security provided by Medicare Advantage -- but that security can come with a widely varying price tag.

Five states with the costliest Medicare Advantage plans
Based on data provided by, the average Medicare Advantage premium in 2016 nationwide is $64.92 per month, a 4% increase from the $62.69 that seniors paid in 2015. Most private insurers have priced their plans more or less right around this mark; however, some states have average monthly premiums well over $100.

The following five states have the highest average Medicare Advantage premiums according to HealthPocket:

  • North Dakota: $140.72
  • South Dakota: $125.72
  • Minnesota: $111.62
  • Hawaii: $96.40
  • Michigan: $93.16

Mount Rushmore, South Dakota. Image source: Pixabay.

It's worth noting that Alaska wasn't included in HealthPocket's data, but my assumption (which we'll get to in a moment) is that had it been, it would likely have worked its way into the top five.

By comparison, seniors in sunny California and Florida, along with Iowa and Utah, are paying less than $30 per month, on average, for Medicare Advantage premiums. 

Why Medicare Advantage prices vary so much
You might be wondering why the five aforementioned states can set back seniors anywhere from three to five times as much as states like Florida or Utah. The answer probably lies with the following three factors.

First, as we've seen with any type of private health insurance, premium prices are often a reflection of access to medical care. Hawaii's separation from the mainland U.S., the sparse populations of the Dakotas, and Minnesota's and Michigan's harsh winter weather all create potentially adverse scenarios when it comes to getting patients the care they need.

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For instance, North Dakota's sparse population might make it economically unreasonable for hospitals, especially in small communities, to purchase sophisticated equipment to fight and detect cancer. This might mean a senior with cancer covered by Medicare Advantage in North Dakota may need to travel out of state for certain treatments, which can be very costly to the insurer.

Secondly, it's a matter of competition. Just as the Affordable Care Act (better known as Obamacare) was designed to boost competition on marketplace exchanges by making cross-comparisons of plans as transparent as possible, the more Medicare Advantage plans there are for seniors to choose from in a given state, the more competitive the pricing is likely to be.

Based on a quick search via HealthPocket, Hawaii offers its seniors less than three dozen Medicare Advantage plans to choose from in 2016. By comparison, the retirement-friendly state of Florida offers 131 Medicare Advantage plans, with 28 different providers represented. Sometimes the answer is as simple as supply and demand -- occasionally it can pay for seniors to retire in a state that's highly populated and where access to medical care is abundant.

Third, there are variations in pricing among individual insurers themselves. Some insurers have begun pushing precipitously higher healthcare costs back to their consumers. They do this by tinkering with the premium and adjusting the out-of-pocket limits in tandem.

As noted by the Kaiser Family Foundation's Medicare Advantage report released in December, in 2011 the average out-of-pocket spending limit for prescription drug plans (commonly known as Part D) was $4,285, with about half (49%) of all plans boasting out-of-pocket limits of $3,401-$6,700. In 2015, a whopping 90% of plans had out-of-pocket limits of at least $3,401. Pushing out-of-pocket limits higher has allowed some insurers to offer $0 premium plans (yes, zero!), but these plans are often limited in terms of coverage. Generally speaking, the higher the population of a given state, the better the chance of having access to these $0 plans.

Image source: Pixabay.

One common expectation
Regardless of what state you live in, one common expectation among Medicare Advantage plans is that they're going to get more expensive as time passes.

UnitedHealth Group, coincidentally one of the largest players in Medicare Advantage, has struggled mightily in Obamacare's individual marketplace, and most insurers have been generating margins well below expectations. In response to higher medical costs, insurers such as Aetna and Humana are merging. However, these two are also huge players in the Medicare Advantage space, with more than 60% of Humana's annual revenue coming from Medicare Advantage plans. As insurers combine, competition could be stifled, ultimately reducing premium pricing pressure.

Additionally, there are no real checks and balances in place to control medical costs. Prescription drug prices are growing at a much faster clip than wages and inflation, and even efforts to stymie premium pricing growth on the Obamacare marketplace exchanges haven't worked well. Insurers will do what's necessary to remain profitable, which likely means seniors will owe more out-of-pocket, or in upfront premiums, in the coming years.

What's this mean for you? If Medicare Advantage is an option that appeals to you, it means taking the time to really understand your choices. Just because your state may be among the highest or lowest cost states for average Medicare Advantage premiums doesn't mean you don't have options. It also means not taking your plan at face value one year to the next. Insurers adjust their prices annually, so stay vigilant in your analysis of whether or not you've found the best value year in and year out.