The supplemental income divide in Medicare.

From Mark Miller’s Retirement Revised.

Most Medicare enrollees are protected from high out-of-pocket costs in one way or the other. In a new brief, the Kaiser Family Foundation finds that roughly 40% are in Medicare Advantage plans, which have built-in caps on out-of-pocket outlays, usually around $5,000 annually. The rest are in traditional Medicare, which does not have a built-in out-of-pocket cap. Most get that protection from Medigap, retiree coverage or Medicaid. 

But here’s the striking thing about the chart above: 10% of Medicare enrollees have no protection from this risk. They’re in traditional Medicare but have no supplemental coverage.

Kaiser reports that the supplemental divide is defined by income:

Compared to all traditional Medicare beneficiaries in 2018, a larger share of Medigap policyholders had annual incomes greater than $40,000, had higher education levels, were disproportionately White, and were in excellent, very good, or good health . . . A larger share of beneficiaries with no supplemental coverage had annual incomes between $20,000 and $40,000, were under the age of 65 (and eligible for Medicare due to having a long-term disability), and were men.

“What we’re starting to see is sort of an income divide in Medicare,” said Tricia Neuman, director of the Medicare policy program at the Kaiser Family Foundation during a webinar this week sponsored by the Center for Medicare Advocacy. “People who can afford to purchase Medigap or have retiree benefits – which tends to be higher income people – are in traditional Medicare. But there are five million people in traditional Medicare with no supplemental coverage. These are people who are especially exposed to high out of pocket spending.”

Medicare Advantage enrollment shouldn’t be viewed as complete protection against high out-of-pocket costs. After all, $5,000 ain’t nothing. In fact, over time, I’ve come to understand Advantage as a form of high-deductible/lower premium health insurance with a managed care feature. 

Kaiser reports that Advantage enrollees tend to be lower income and less educated. They also are more likely to be people of color.

Bottom line: Medicare enrollment patterns reflect our society’s broader income divides and wealth inequality. Those who can afford it enroll in traditional Medicare with a Medigap plan or other supplemental coverage. That’s a smart move – this combination is the gold standard in Medicare coverage. Those with lower income or wealth pick Medicare Advantage for its lower upfront costs – or they are going without supplemental coverage at all. The Medicare Advantage solution works well in some cases, so long as you’re willing to accept the provider network limitations and risk of shelling out thousands of dollars annually in the event of high health care costs.

But the supplemental income divide underscores once again the need for a more level playing field between traditional Medicare and Advantage. The two options should have a unified, low out-of-pocket ceiling without the need for supplemental coverage.

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