• Wiser Medicare

What Are the Real Costs of Original Medicare and Medicare Advantage?

Updated: Jun 26

As you compare Original Medicare and Medicare Advantage, you might be looking at the quality of care, ease of access and convenience. But Medicare isn't free. And since you will be paying for healthcare for decades in retirement, you really have to get the "affordability" part right.

Let's look at all the out-of-pocket costs, then summarize with five cost-related pros and cons for each.


Original (or Traditional) Medicare

Costs are standardized and set by the government for Part A (hospitalization coverage) and Part B (medical coverage). In addition, you may want an optional Part D (prescription drug) plan, plus an optional supplement insurance (Medigap) plan to reduce your exposure to open-ended out-of-pocket costs. Private insurers provide Part D and Medigap plans.

[Source: https://www.cms.gov/newsroom/fact-sheets/2022-medicare-parts-b-premiums-and-deductibles2022-medicare-part-d-income-related-monthly-adjustment ]

Few people pay a Part A premium, but in 2022 you will pay the first $1,556 of each hospitalization, plus copayments if you stay beyond 60 days. Everyone pays the Part B monthly premium of $170.10 (or more for high earners). You will have to pay the first $233 (annual deductible) before Medicare picks up 80% of authorized expenses. You pay 20%, with no upper limit.

Your Part D premium can range from a low of $5.50 in Colorado to a high of $207.20 in South Carolina. [Source: https://www.kff.org/medicare/fact-sheet/an-overview-of-the-medicare-part-d-prescription-drug-benefit/ ] You will pay the annual deductible first (up to $480 in 2022), then coinsurance of up to 25% depending on your plan and the medications you take. The out-of-pocket maximum for covered medications is $7,050.

But many of these costs disappear if you have a Medigap policy, where the monthly premium for the most comprehensive plan averages $143. [Source: https://www.businessinsider.com/how-much-medigap-plans-cost-every-state-ranked-2018-6?op=1 ] It pays your Part A deductible of $1,556 and covers 365 days of hospital costs after your benefits are used up. It also pays most (if not all) of Part B's 20% coinsurance, but it doesn't cover any Part D prescription drug costs.

"Takeaway" action step – Go to the Medicare.gov website to compare the cost and benefits of different Medigap plans.


Medicare Advantage (or Part C)

Medicare Advantage, the alternative to Original Medicare, is also called Part C. It bundles Parts A, B and D together – so you won't need a separate Medigap or Part D plan. Private insurers set all costs, so they can vary greatly.

Almost no one pays a Part A premium, and your plan pays the $1,556 hospitalization deductible. Almost everyone pays the standard Part B monthly premium of $170.10 in 2022, plus an income-based adjustment for high earners. However, some plans may absorb part or all of the Part B premium.

The monthly Part C Medicare Advantage plan premium is often $0, although some can reach hundreds of dollars. (The 2021 national average was $21.) [Source: https://www.cms.gov/files/document/medicare-oe-2020-ma-avg-mthly-prem-2007-21-small.pdf ] The annual deductible can be quite high for low-premium plans. After the deductible, you will pay copayments and coinsurance for most doctor's visits and medical procedures, up to an out-of-pocket of $7,550 in 2022 (not counting prescription drug expenses).

Part D is included for free in most plans, and your annual deductible of up to $480 may be as low as $0. After the deductible, you will enter a series of "periods" of varying payment structures (maximum 25%) up to $7,050 for prescription drugs, then a small residual for the rest of the year. [Source: https://www.kff.org/medicare/fact-sheet/an-overview-of-the-medicare-part-d-prescription-drug-benefit/ ]

"Takeaway" action step – Look around the Medicare.gov website to see the costs and tradeoffs of different policies – tailored to the medications you take. That will give you the best estimate of what your Medicare Advantage policy might cost.


Final Comparison

The monthly fixed costs for Original Medicare, based on averages, could be $170.10 for Part B, $33.37 for Part D and $143 for Medigap, or $346.47. Based on averages, Medicare Advantage could cost $170.10 for Part B and $21.00 for Part C, or $191.10.

However, Medicare Advantage is not necessarily the best option. That depends on plan deductibles, copayments, coinsurance and how much healthcare you will need.


The Top Five Pros and Cons of Original Medicare and Medicare Advantage Costs


Original Medicare:

  • Con: There is no out-of-pocket limit to your Part B 20% coinsurance (unless you buy a Medigap policy).

  • Pro: With a Medigap policy, your Part B 20% coinsurance is covered, and you can estimate what your healthcare costs will be each year for life.

  • Con: If you include a Medigap policy, total fixed monthly premiums are higher than Medicare Advantage.

  • Pro: Part B and D deductibles are low and set by the government.

  • Pro: You can move easily from Original Medicare to Medicare Advantage if premiums become unaffordable.

Medicare Advantage:

  • Pro: Out-of-pocket expenses are limited.

  • Con: As you age and use your insurance a lot, you can face out-of-pocket maximums as high as $7,550 for Part C plus $7,050 for Part D.

  • Pro: Monthly premiums are low, especially if your plan absorbs some of your Part B premium.

  • Pro: Each year, you can tailor your plan's premiums, deductibles and copayments to your budget and healthcare needs.

  • Con: it is very difficult to move from Medicare Advantage to Original Medicare if you need more control over healthcare expenses.

 


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