When it comes to entitlement programs, Social Security -- with its trust fund expected to run dry by 2035 -- usually winds up getting the lion's share of the attention. Why? Because Social Security is a program that contributes to the pockets of most seniors on a monthly basis.
Medicare has a "retirement" problem
However, Medicare, the program predominantly designed to aid seniors in paying for hospital and outpatient services, has issues of its own. A 2015 report from the Medicare Trustees found that Medicare's Hospital Insurance (HI) Trust is set to exhaust its cash reserves by 2030. While this doesn't mean that Medicare is in any way going bankrupt, it does signify that a revenue shortfall appears imminent. Per the Trustees' report, incoming payroll taxes could cover about 86% of current Medicare HI expenses by 2030, with the program sustaining itself at that level through 2089.
Two primary issues are responsible for the Medicare HI Trust cash shortfall. First, people are living longer than ever (almost 79 years according to the Centers for Disease Control and Prevention), meaning seniors eligible for Medicare are leaning on the program for a longer period of time than they did a few decades ago.
The other issue involves rapidly rising healthcare costs. Innovative cancer drugs, a focus on personalized medicine, hi-tech diagnostics, and robotic surgical tools are all examples (albeit just a small snippet of the big picture) of why healthcare costs are rising at a pace that's often much faster than inflation.
Is this Medicare's biggest problem?
Yet the biggest issue with Medicare may be something far bigger than just shifting demographics. According to years' worth of survey data, seniors' inability to understand the complexities of Medicare may be leading to poor decision-making.
Based on a survey conducted by the Kaiser Family Foundation in 2012, more than a third of low-income seniors were completely unaware that Medicare had an enrollment period, compared to only 11% of higher-income seniors. The survey from KFF also found that just three in five Medicare recipients review their plan options each year.
Of course, there's more fuel for the fire beyond just a single survey from KFF. We can go all the way back to 2005 when the duo of KFF and Harvard School of Public Health questioned seniors on their understanding of Medicare's then-new drug benefit, which is known now at Part D. At the time of the survey, a whopping 61% of respondents claimed to understand Part D "not much at all" or "not at all." Furthermore, just 5% of seniors correctly identified how many drug plan options they'd have to choose from.
In 2011, another survey released by UnitedHealthcare and the National Council on Aging showed that less than half (46%) of seniors had a solid understanding of how Medicare works, and 39% of seniors said their ability to navigate Medicare's options was "fair to poor."
Long story short, education is a major Medicare obstacle for far too many seniors.
Medicare versus Medicare Advantage: understanding your options
Building upon seniors' education shortfall is the fact that there's also a non-traditional Medicare option to choose from, known as Medicare Advantage. Understanding how the original Medicare works, as well as the differences between original Medicare and Medicare Advantage, can go a long way to bridging the knowledge gap that's currently holding seniors back from making the best possible plan choice.
Let's do a brief compare and contrast so you'll have the answers you need to some of the most common Medicare and Medicare Advantage questions.
Q: What is Medicare?
Medicare is a government-sponsored plan that consists of three primary components -- Part A, Part B, and Part D -- and is primarily designed to help seniors aged 65 and up cover some of their healthcare expenses.
Part A, which is also known as hospital insurance, helps to cover costs tied to hospital care, home health services, skilled nursing services, and hospice. Most people do not pay a premium on Part A. Part B, however, does have a premium, and covers outpatient services and doctor visits. Lastly, Part D is the aforementioned prescription drug plan, which also carries a monthly premium.
Q: What is Medicare Advantage?
Medicare Advantage, or Part C, is insurance coverage offered by private insurance companies, which replaces Part A, Part B, and usually Part D as well. Certain safeguards are built into Medicare Advantage plans that ensure private insurers don't charge more than the original Medicare for certain treatments and procedures.
Q: What are the advantages and disadvantages of the original Medicare?
As a massive government-sponsored program that covered 37.3 million Americans under Part A and Part B as of July 28, 2015, one of the biggest advantages of the original Medicare is that it's accepted by most physicians nationwide. This means your primary care physician will likely remain your PCP for a very long time, since there's essentially no worry about them being "within your network." You'll also not need a referral to see a specialist.
Disadvantages? Original Medicare typically has a 20% out-of-pocket cost to seniors for Medicare-approved treatments. The issue is that these costs aren't capped. This means someone undergoing an expensive cancer treatment could wind up footing a very large bill. It should be noted that Medigap coverage is available for purchase to help cover this 20% cost funding gap. Additionally, Part A and Part B don't cover prescription drugs, meaning original Medicare enrollees will need to purchase a prescription drug plan under Part D.
Q: What are the advantages and disadvantages of Medicare Advantage?
Medicare Advantage plans, which are offered by private insurers, operate similarly to the individual health plans you can buy prior to turning 65. You'll have a monthly premium, copays, and deductibles. The main benefit of the Medicare Advantage plan is that your out-of-pocket costs are capped each year, which prevents big financial surprises during retirement. Most Medicare Advantage plans also have prescription drug coverage rolled into the cost. In 2015, the deductible limit on Medicare Advantage plans capped at $6,700.
The downside? Because Medicare Advantage plans are run by private insurers, your choice of in-network physicians will be much narrower than under original Medicare. Plus, Medicare Advantage plans can change what PCPs are in and out of their network on an annual basis. Additionally, you may be required to get a referral or prior approval to see a specialist with a Medicare Advantage plan.
Q: When can I enroll?
The typical enrollment period for Medicare and Medicare Advantage runs between Oct. 15 and Dec. 7 of each year for eligible Americans. Any changes you make will take effect on Jan. 1 of the following year.
During this period you'll have the opportunity to switch between an original Medicare and Medicare Advantage plan, switch from one Medicare Advantage plan to another, join an original Medicare prescription drug plan, switch your original Medicare prescription drug plan, or drop your Medicare drug plan coverage.
There's also a special enrollment period between Jan. 1 and Feb. 14 that'll strictly allow Medicare Advantage plan enrollees to switch to original Medicare, as well as join an original Medicare prescription drug plan. No other changes can be made (i.e., switching from original Medicare to a Medicare Advantage plan) during this enrollment period.
Taking the time to understand your options and examining the plans available to you (there may be more than a dozen Medicare Advantage or original Medicare Part D plans available) are the keys to getting the most out of Medicare, and to maximizing the programs' efficiency.
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.
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.