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What Are Medicare Replacement Plans?

Medicare is confusing enough as it is, but when we start tossing in lots of different names for the same thing, it makes it even more confusing! So, what are Medicare replacement plans?

The term “Medicare replacement plan” is often used when referring to Medicare Advantage plans, also known as Medicare Part C. It’s a little misleading, but it’s also easy to see why so many providers refer to Medicare Advantage plans as “replacement plans” for Original Medicare.

Medicare Advantage plans are private policies sold by insurance carriers. Instead of your medical claims going to the federal government, they’ll go to the private carrier instead. So in that sense, they “replace” your coverage under Original Medicare (Parts A and B).

However, the term can be a little misleading because it leads people to believe they don’t need to enroll in Medicare or that they can never switch back to Original Medicare. Neither of those things is true.

Woman wondering, "What are Medicare replacement plans?"

Why Providers Refer to Medicare Advantage Plans as Replacement Plans

Providers commonly refer to Medicare Advantage plans as replacement plans because that's how many beneficiaries and their doctors often perceive them. When you decide to enroll in a Medicare Advantage plan, you are formally telling Medicare that, until December 31st, you choose to receive your Part A and Part B benefits through the Medicare Advantage plan rather than Original Medicare.

While it may seem like you are substituting your Original Medicare with a Medicare Advantage plan, it's crucial to recognize that this doesn't indicate a permanent disenrollment from Medicare. It's a temporary choice, and you must maintain enrollment in both Parts A and B to be eligible for an Advantage plan. So yes, you still have to pay the Part B premium. (And the Part A premium if it applies to you.)

You always retain the option to revert to Original Medicare during a valid election period. However, for the time being, you are opting to be part of the Medicare Advantage plan. As part of this agreement, you commit to utilizing the plan's network of doctors and hospitals for your healthcare needs. Additionally, your healthcare providers will submit their invoices to the Medicare Advantage insurance company instead of billing Original Medicare whenever you access healthcare services.

Why Were Medicare Replacement Plans Created?

The creation of the Medicare Advantage program in the late 1990s aimed to provide beneficiaries with an alternative to Original Medicare and Medigap plans. For individuals who find Medigap plan premiums unaffordable, these Medicare Advantage "replacement plans" offer a viable option, allowing them to receive benefits from a private plan rather than relying solely on Medicare.

It's important to note that enrollment in both Medicare Parts A and B is still a requirement when joining an Advantage plan. However, the monthly premiums for Medicare Advantage plans are often lower compared to Medigap plans. This cost difference is possible because Medicare Advantage plans establish networks of healthcare providers and negotiate contracted rates, granting the insurance company better control over expenses.

In HMO-style plans, selecting a primary care provider and obtaining referrals for specialists are typically necessary. Treatment outside the plan's network is usually restricted, except in emergency cases. PPO-style plans allow treatment with out-of-network providers, albeit at higher costs.

How Medicare Replacement Plans Work

Upon enrolling in a Medicare Advantage plan, Medicare pays the insurance company a monthly fee to manage your claims and disburse any necessary benefits. The plan is obligated to provide all the Medicare Part A and Part B services that you would typically receive from Original Medicare. However, coverage determinations are made by the plan's underwriters instead of Medicare.

Ideally, you should seek treatment from the plan's network of providers. Going outside the network may result in limited or no coverage, and you might incur higher out-of-network costs, subject to the plan's network rules.

When you join the plan, you will receive a Summary of Benefits outlining all covered services and detailing your share of the costs for those services. It's crucial to review this document carefully to understand your financial responsibilities for lab work, hospital stays, surgeries, cancer treatments, and other services.

Additionally, many Medicare replacement plans incorporate a built-in Part D drug benefit. This integrated approach allows individuals to use a single member ID card for hospital, outpatient, and drug-related needs, streamlining the healthcare experience for some beneficiaries.

Review Your Benefits During AEP

It's important to note that the benefits of Medicare replacement plans undergo annual changes. When you enroll in a plan, the premiums and cost-sharing you pay are applicable for that specific year. In September of each year, the plan sends you an annual notice of change letter detailing all the modifications within the plan for the upcoming year. These changes may include adjustments to premiums, copays, and coinsurance.

Providers within the network can also exit at any time. If a provider you're seeing leaves the network during the year, you may be unable to continue seeing that provider until your next valid election period, when you can consider changing the plan.

The list of covered medications, known as a drug formulary, may also be subject to changes from year to year. If you're not happy with the plan's alterations for the upcoming year, you have the option to switch to a different Medicare Advantage plan offered in your county during the fall Annual Election Period. You can also choose to return to Original Medicare and apply for a new Medigap plan, provided you can answer "no" to the medical questions and pass the Medigap plan's medical underwriting.

Should I Enroll in a Medicare Replacement Plan?

Before deciding if a Medicare Advantage plan is right for you, take the time to thoroughly research various aspects of the plan. Consider examining the plan's premiums, network, copays, coinsurance, deductibles, pharmacy network, and drug formulary. Ensure that your key healthcare providers are included in the plan's network, check the available hospitals, and verify that the plan's formulary covers all your essential medications.

For additional insights into the advantages and disadvantages of Medicare replacement plans, chat with one of your advisors at Local Medicare Specialists. We’ll help you make sense of Medicare and search for plans in your area.

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