How Can Medicare Advantage Part C Plans Be $0 Premium?

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It’s almost impossible to watch television today without seeing a Medicare advertisement promoting a $0 premium Medicare Advantage plan.

Have you ever wondered how an insurance company can offer a plan for no additional cost, and why they just don’t call these plans “free?”

Let me explain.

Original “fee-for-service” Medicare has several risks or coverage gaps that a new enrollee can mitigate in typically one of two ways: purchase one of several MediGap plan options along with an appropriate Part D prescription drug plan that work with Original “fee-for-service” (“FFS”) Medicare, or enroll into a Medicare Advantage plan which may have a monthly premium as low as $0 per month.

Even is a Medicare Advantage plan premium is $0 per month, it is not considered “free” because the enrolled member must pay their monthly Medicare Part B premium to the government.

With FFS Medicare, the government pays the medical provider a fee for each service or procedure. Medicare Advantage plans essentially replace Original FFS Medicare. With Medicare Advantage, the government pays an insurance company a set amount per member per month, a payment model called “capitation,” to manage the healthcare expenses of enrolled members, regardless of whether or not the member seeks care from medical providers.

Capitation amounts paid to insurance companies are established based upon several factors.

First, the federal government assigns a benchmark rate to each county to account for differences in costs of care. For example, New York City has a higher benchmark rate than Puerto Rico.

Next, plans calculate a “risk score” for each member based on his or her health status. The less healthy an enrollee is, the higher their risk score will be.

Finally, plans can also receive bonus payments based on “Star” ratings given to them by the government. Star ratings are on a 5-star scale, reflecting member health and satisfaction. Plans with 4 or more stars receive a 5% Quality Bonus Payment (QBP). Small plans and new plans that have existed for less than 3 years receive a 3.5% QBP.

The benchmark rate, average risk score for patients in a plan, and QBP rate are then multiplied to determine a plan’s PMPM rate.

As of January 2019, the federal government paid insurers between $10,000 and $14,000 per year for each Medicare Advantage member on average.

If you have any questions about Medicare Advantage plans or any other Medicare questions, or if you just need help enrolling, please connect with one of our Member Agents. There are never any fees for their educational or enrollment services!

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