You better shop around: Medicare's looming open enrollment

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Here's what you need to do if you're eligible for Medicare: Carefully examine your options for the upcoming open-enrollment period, and switch plans if needed.

But here's what the vast majority of people on Medicare actually do each year during open enrollment: They don't carefully examine their options, and they don't switch into a better plan.

As enrollment in that health insurance system administered by the federal government continues growing—54 million people this year—the options they are presented with remain complicated. Those options include traditional, or original, Medicare, individual Medicare Advantage plans, Part D prescription drug benefit plans and Medigap supplemental insurance plans.

However, widespread confusion, frustration and inertia keep many people from changing their choice each year, despite the fact that key aspects of their plans might be changing.

Most people age 65 or over this open-enrollment period—which runs from Wednesday, Oct. 15 through Dec. 7—are expected to stick with their existing plan choices, just as they've done in past years.

That phenomenon, experts agree, can leave seniors on the hook for otherwise avoidable health-related expenses when they learn their preferred doctors, hospitals and prescription drugs are not covered in the same ways, if at all, by their existing Medicare plan.

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"We did focus groups asking seniors how they choose and change their health insurance plans, and overall, seniors found it to be a very confusing process and an overwhelming process," said Gretchen Jacobson, associate director of Medicare policy at the Kaiser Family Foundation health policy research organization.

"People tend to stick with the plan they originally chose. People tend to be very sticky. Seniors said they don't like to revisit their plan choices and go through that process again, because they found it frustrating to begin with," said Jacobson, who cited, as an example, research that found just 12 percent of seniors switched their Part D plans between 2006 and 2010.

"People do not switch plans even as the benefits of their plans do change, and even as different plans would meet their needs better," Jacobson said. "Beneficiaries should revisit their plan choices and look to see if another option would fit their needs. . . . Studies have found that if people were to switch plans, they would actually save money."

Kev Coleman, head of research and data for the health plan comparison site HealthPocket.com, agreed, saying, "There's a compelling financial reason" for everyone on Medicare to shop around.

"There's really no one-size-fits-all," Coleman said of Medicare.

Coleman and Jacobson both told CNBC.com that Medicare enrollees each year need to not only look at the premiums charged by their plans but also closely examine what their maximum out-of-pocket costs could be, what physicians and hospitals are in the network of providers they can use without incurring added costs, and what drugs are included in the plan's "formulary," or list of covered prescriptions.

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In a report issued last week, Christine Harhaj, a senior manager at the Avalere Health consultancy, said, "When seniors choose a prescription drug plan for 2015, they should carefully look at their options to select the plan that best meets their health and financial needs."

"While beneficiaries will welcome lower premiums, they will need to look at other facets of benefit design, including how their medications are covered, cost-sharing responsibilities and total out-of-pocket spending," Harhaj said. Those cost-sharing responsibilities include the deductible that people must first pay before the plan covers the drugs, as well as any additional costs on top of that, such as co-payments.

But unfortunately, while experts concur about the need to shop around, there are not necessarily simple ways to do that for current Medicare enrollees, and for the 10,000 people turning 65 every day and becoming eligible for the program.

Although sites like the government's Web site Medicare.gov, HealthPocket.com, eHealthinsurance.com, and GoHealth.com offer Medicare comparison tools and other aids for shopping, and many people ask insurance agents for help, even the most patient, and intelligent Medicare enrollee often has a hard time deciding what their best option is. The federal government's handbook, "Medicare & You," runs to 152 pages.

In a Kaiser focus group, "We did have one retired aerospace engineer . . . and he said that every year he made a spreadsheet of all his options but he said that he still found it to be frustrating and confusing," Jacobson recalled during a panel discussion in May.

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A report Jacobson co-authored that same month noted that, "for many seniors, selecting in an initial Medicare plan is an unexpectedly daunting task."

"The plan environment in Medicare today is quite unlike that of 10 or 20 years ago, when the vast majority of seniors were enrolled in traditional Medicare," the report said, citing the emergence of Medicare Advantage and Part D drug plans.

About 70 percent of Medicare enrollees today still are on traditional Medicare. For most of them, they don't have to pay a monthly premium for their hospitalization insurance, known as "Part A," but they they all pay at least a $104.90 monthly premium for "Part B" benefits, the ones that cover medical services such as going to the doctor. People in traditional Medicare also have to sign up, and pay for, a Part D prescription drug plan.

Because traditional Medicare covers, on average, about 80 percent of an enrollee's health costs, enrollees can be, and sometimes are, confronted with out-of-pocket health costs that can strain their budgets, particularly if they are on fixed incomes. There is no annual or lifetime cap on such out-pocket spending.

Such costs include a $1,216 deductible for hospitalizations, which can be charged again after you are admitted again to a hospital after having been released and stayed out of it for at least 60 days in a row.

To lower the burden of that and other out-of-pocket costs, about a quarter of traditional Medicare enrollees buy supplemental insurance known as Medigap. About 40 percent also have similar, employer-sponsored supplemental insurance.

While some Medigap plans cover all out-of-pocket costs incurred by an enrollee, others don't. And "they're not inexpensive," said Jacobson, who pointed out that the average premium for Medigap plans was $183 per month in 2010, which was on top of monthly Part B and Part D premiums.

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Traditional Medicare does offer enrollees a simple rule of thumb for determining what doctor they can go to and have their plan cover the visit: Any doctor who accepts Medicare payments.

But there's a potentially very big downside in traditional Medicare: no cap on the out-of-pocket expenses that can be incurred by an enrollee. That downside, as well as other factors, have led to strong growth in the alternative known as Medicare Advantage.

About 30 percent of Medicare enrollees, or 15.7 million people, are now in Medicare Advantage plans, compared to just 13 percent of enrollees in 2005. Those plans are offered by private insurance companies such as Humana, Aetna, Cigna and United Healthcare, but their costs are subsidized by the government's Medicare program.

Because of those subsidies, more than half of Medicare Advantage enrollees last year paid $0 per month in premiums. The number of $0 premium plans is expected to drop by 19 percent in 2015, according to HealthPocket, while the average Medicare Advantage premium for 2015 will be $33.90 per month, according to the Centers for Medicare and Medicaid Services.

All Medicare Advantage enrollees also have to pay the regular Medicare Part B premium as well.

Most Medicare Advantage plans cover prescription drug benefits. And many also include vision and dental benefits that are not included in traditional Medicare.

Medicare Advantage plans decoded

Also unlike traditional Medicare, the Medicare Advantage plans have a cap on the out-of-pocket spending that beneficiaries can incur in a year when they remain in-network: $6,700, with many plans offering a cap lower than that, according to HealthPocket.

While that cost ceiling is indeed an advantage for many enrollees, particularly those in poor health, who use medical providers and drugs more frequently than others, there is a key trade-off: narrow networks of participating doctors and hospitals. Unlike traditional Medicare, the Medicare Advantage plans can, and do, limit the providers it covers for enrollees.

And plans do change the makeup of their networks—as well as their cost-sharing structures—which are additional reasons why enrollees every year should check the design of their Medicare Advantage plan, and the designs of other such plans, experts said. Brand loyalty is often high among plan enrollees, but such loyalty can blind people to the fact that over time, their tried-and-true plan may end up costing them more money than if they had switched to another plan, which itself might have changed its design over time.

A Kaiser report on Medicare Advantage in May noted that as enrollment in Medicare Advantage plans grew, the average monthly premiums have declined, from $44 in 2010. But, the report added, "some evidence indicates that plans have made other adjustments to cut costs, for example, by increasing out-of-pocket limits, which could affect beneficiaries with relatively high health care expenses and by narrowing their provider networks."

That last point—the size of provider networks—can end up being a major issue for seniors.

"At the end of the day, health insurance is only as good as the hospitals and doctors that accept it," said Coleman of HealthPocket.

Another feature of Medicare Advantage, which is seen as a selling point for many, can be a downside for enrollees. This year, according to Kaiser research, the average Medicare beneficiary could choose from 18 Medicare Advantage plans. That amount of choice "can be very overwhelming," said Coleman.

While the amount of options can be daunting, switching within Medicare Advantage plans, or into such plans from traditional Medicare, can be worth the hours spent researching and comparing choices. Coleman said seniors should check to see if their preferred doctors and hospitals are included in a plan's network, whether their current medications are covered by the drug plan's formulary and to what extent, and to what extent enrollees would have to shell out for co-payments, co-insurance and deductibles.

A HealthPocket report issued in March found that for a "typical new Medicare enrollee," signing up for a Medicare Advantage plan "could save almost 20 percent over original Medicare and 45 percent over Medigap" supplemental insurance.

"For the average person, all things being equal, Medicare Advantage looks to be the best," Coleman said.

That report analyzed the costs for people in traditional Medicare and with Medigap coverage, compared to the costs for a Medicare Advantage enrollee if those people visited a specialist four times, a primary physician twice and was taking three commonly prescribed drugs.

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"In scenarios where a Medicare enrollee remains in-network for health care and no off-formulary medications are taken, it is difficult to imagine a situation where a $0 premium Medicare Advantage plan is not a less-expensive than Original Medicare with a prescription drug plan," the report noted.

That said, the HealthPocket report data is based on an estimate of the health services an enrollee will use during the coming year. While a person's current medical condition can be a helpful guide, it won't always lead to the optimal choice.

For example, a healthy senior who currently doesn't care much about the specialists covered by their current Medicare Advantage plan might care very much if they are diagnosed with cancer in June.

Coleman said that someone may say, "'I can afford a plan with lower premiums but higher out-of-pocket costs, because I don't expect to use the benefits.'"

"But that could come back to bite you if you have a cardiac event or stroke," Coleman said. "At the end of the day, you're making your best guess."

Another unknown is how the Affordable Care Act, also known as Obamacare, is going to change the landscape for Medicare Advantage plans and their premiums and design for enrollees.

The ACA is set to phase in more than $150 billion in direct cuts to the federal government's contribution to Medicare Advantage plans in coming years.

"Thus far, we have not seen large changes in plan premiums" as a result, Kaiser's Jacobson said.