Funding For Medicare Advantage Plans
Private insurance companies offer Medicare Advantage plans as well as
Medicare supplement plans. Advantage plans are funded through federal government general funds, Medicare premiums, and payroll taxes.
The federal government, on an annual basis, determines how much to pay private insurance companies to insure each Advantage member. What many individuals may not be aware of is that the private insurer enrolling an Advantage member becomes the primary insurer, the federal government plays no part in insuring the individual. With Medicare supplement plans the federal government remains the primary insurer and the private supplement insurer is secondary.
So How Do Insurance Companies Offering Medicare Advantage Plans Make a Profit?
Insurers offering Medicare Advantage plans receive a set amount of money from Medicare for each individual enrolling in their Advantage plan. Separately, Medicare pays the insurer for any Advantage plans that include prescription coverage, which most do. Through a bidding process Medicare awards contracts to each insurer. Each insurance company submits a price per member to Medicare to become the primary insurer of each Advantage member.
Medicare sets benchmark amounts per region. Benchmarks are a percentage of what it costs Medicare to insure an individual. Benchmarks range from 95%-115%. If an insurance company submits a plan with benchmarks higher than this range the Advantage plan policyholder must make up the difference in the form of a monthly premium.
Sometimes an insurance company submits a bid that is lower than benchmark levels. When this occurs Medicare and the private insurer split the difference in cost and rebate the rest to those enrolled in the Advantage plan.
Medicare also pays private Advantage plans a bonus if they receive high ratings of four or more stars.
How Much Does the Government Pay Medicare Advantage Plans?
You may be shocked to learn that private insurance companies that offer Advantage plans receive federal payments of over $1000 a month, per person, that enrolls in their Advantage plan. The insurer may also receive bonus cash if their ratings are high enough, and of course a separate payment for prescription coverage. If the individual enrolling in an Advantage plan is high-risk such as those with diabetes or heart disease, the insurance company may receive an additional nearly $10,000 from Medicare to enroll the individual in an Advantage plan.
Bottom Line
Most insurance companies are for-profit (though Blue Cross and Blue Shield of Arizona is a non-profit organization.) Simple math tells us that the for-profit insurer must keep an Advantage plan member’s expense below $12,000 annually to make a profit. To make a profit they must apply cost-sharing such as deductibles, co-insurance, and co-pays which average over $7500 a year in out-of-pocket expenses for the average Advantage plan policyholder. Insurers must also limit the number of doctors and hospitals in their Advantage network to keep reimbursement rates as low as possible.
Over 80% of all medical claims in the country occur in the 65+ market. This makes sense of course, as we age things simply don’t work as well as they used to. What many are not aware of is the cost of care. As an example, a pacemaker can be implanted in a doctor’s office, no need for a hospital visit. Paying for the pacemaker may cause heart palpitations though… $80,000! As you can see it doesn’t take much to wipe out the $12,000 the insurer collected from Medicare to enroll an individual in their Advantage plan. And the $80,000 does not include all the testing, blood work, etc., associated with such a procedure. Often, before the individual knows they have a need for a pacemaker they have an accident such as passing out and breaking a bone… none of which is part of the $80,000.
Medicare supplement plans on the other hand (
especially the BCBSAZ Senior Security Plan G) limit out of pocket expenses to a couple hundred dollars a year (Part B deductible which varies year to year,) and you can see any Medicare contracted provider in the country (94% of all providers are contracted with Medicare, 99% if you don’t include pediatric physicians.) A 65-year-old can purchase a Plan G for under $130 a month. In the long run a Medicare supplement G policy will save you money and offer a much wider selection of providers and specialists throughout the country. You can move out of state and keep the policy. There’s even limited coverage when traveling abroad. A separate prescription plan is required, many under $10 a month, but most average $33.
