We’ve been getting questions from people confused about how the Affordable Care Act (ACA) will affect Medicare and related health care plans in the months ahead. This confusion is understandable. In this column, we’ll try to clear up the confusion and show how a smart consumer can navigate Medicare-related coverages.

First, a quick review of how Medicare, Medicare Supplement and Medicare Advantage plans work.

Medicare is, of course, the federally-administered health care benefit program that provides coverage to most Americans over age 65 (and millions of younger people with long-term health issues). The program is organized into four parts:

• Part A covers inpatient hospital care;
• Part B covers outpatient medical services;
• Part C offers an alternative, a combination of hospital and outpatient services structured along the lines of a managed-care plan;
• Part D covers the cost of outpatient prescription drugs.

About three-quarters of American seniors use Parts A and B, which together operate something like an indemnity insurance plan that offers flexibility in choosing doctors and/or hospitals; the remaining quarter opts for Part C, which—as we’ve noted—operates in a manner similar to an HMO or other managed-care plan.

If you’re eligible for Medicare and opt to use the more-flexible Parts A and B, you are subject to many out-of-pocket fees and expenses. Also, things like dental, vision and long-term care (LTC) coverage aren’t offered. For these reasons, a vibrant market in private-sector Medicare Supplement insurance has grown up around the government program. (This supplemental insurance is often called “Medigap” coverage; but some professionals who work in the market find that term derogatory. So, we’ll try to avoid it.)

Medicare Supplement policies are offered by private insurance companies; but they are heavily regulated by the federal government. All Supplement policies must match one of six coverage templates designed by the Department of Health and Human Services; these templates are named Plans A through F, with A offering the least additional coverage and F offering the most.

A quick note: Medicare Parts A through D and Medicare Supplement Plans A through F do not correspond with one another in any way. They are two totally different groups of coverage that only share, somewhat confusingly, a lettering system for naming their various elements.

The key part of buying Medicare Supplement coverage is timing: If you’re going to buy it, you need to do so during the first six months that you’re eligible for Medicare (usually, though not always, starting the day you turn 65). This six-month window is called the Initial Enrollment Period; during it, your acceptance is guaranteed and the insurance company is required to waive any pre-existing condition exclusions or limits.

If you don’t choose the supplement coverage during your Initial Enrollment Period, you will be subject to medical underwriting and may be subject to pre-existing condition exclusions. These underwriting standards aren’t impossible…but they can be difficult. And they can limit the amount of supplemental coverage you can buy.

If you’d rather avoid the expense and complexity of Medicare and Medicare Supplement coverage, you can choose a Medicare Advantage plan instead.

Like the supplemental coverage, Medicare Advantage (formerly called Medicare+Choice) plans are issued by private-sector insurance companies. These private insurers are paid a monthly fee by the government in exchange for providing managed-care type medical services to eligible consumers. As of last year, the average monthly per capita payment was a little over $900.

If the services provided by the company cost less than the payments collected, the company keeps some profit and rebates the rest to the consumer in the form of a credit that the consumer can apply to buying additional coverage. Through last year, the average annual rebate was about $1,000.

In most cases, Medicare Advantage coverage offers first-dollar coverage (that is, no out-of-pocket fees, deductibles, etc.) in exchange for limiting your selection of doctors and hospitals to those who have agreed to be part of the insurance company’s provider network.

Like Medicare Supplement coverage, Medicare Advantage has a limited Initial Enrollment Period. If you don’t enroll at that time, you’ll have to wait until the next Annual Enrollment Period—which is usually a six-week window from mid-October to early December. And, when you enroll, coverage doesn’t begin immediately; it starts a few weeks later, on January 1.

So, that’s the recap of the basic mechanics. Now, to answer the most common questions….

Can you change your Medicare Supplement plan (that is, your selection from the A to F menu of additional coverages)?

Yes. Most insurance companies will require that you do this during the Annual Enrollment Period. And you may be subject to new health underwriting—so, if your health has declined, you may have trouble switching to a Supplement plan with more coverage.

Can you change your Medicare Advantage plan?

Yes. Again, you’ll need to do this during the Annual Enrollment Period—but, as with other types of managed-care coverage, underwriting standards are usually more relaxed when you’re changing between Advantage plans.

Can you change from a Medicare Supplement package to a Medicare Advantage plan?

Yes. There’s just one big caveat here: the Annual Enrollment Period for Supplement plans and Medicare Advantage are not always the same. To transition smoothly, make sure those enrollment periods match.

Can you change from a Medicare Advantage plan to a Medicare Supplement package?

Yes. But this is the most difficult transition. First, there’s the timing issue on the enrollment periods; then, the Supplement carrier will usually require new health underwriting—so you’ll be subject to a physical and may have some exclusions or restrictions written into the policy.

Does the Affordable Care Act eliminate Medicare, Medicare Supplement or Medicare Advantage plans?

Here’s where things start to get confusing.

The simple answer: The ACA does not eliminate Medicare and Medicare Supplement plans. In fact, the Feds have given several breaks to Supplement insurance companies that suggest their products will do very well in the near-term future (although the long-term prospects aren’t so clear). So, they’re not going away.

However: The ACA will cut—and cut substantially, by 2017—federal funding of Medicare Advantage plans, which will probably leave Medicare Supplement plans as the only available choice for seniors who want to get more comprehensive coverage than Medicare Parts A and B offer.

The main cost-saving element of the ACA, worth an estimated $240 billion in the first 10 years, is…cuts in Medicare Advantage funding. According to a report released in the spring of 2011 by members of the House Ways and Means Committee, “it is estimated that more than seven million seniors will lose their Medicare Advantage plans, resulting in a massive migration of seniors to Medigap plans.”

So, the ACA favors Medicare Supplemental packages over Medicare Advantage plans?

Yes. Another example: Citing language in the ACA, the Department of Health and Human Services has exempted Medicare Supplement carriers from so-called “rate review rules.” This means that Supplement carriers will be free to increase the rates and premiums they charge for the coverage without HHS oversight. This exemption will become important in a few years, when the ACA’s “guaranteed issue” standards are fully implemented. At that point, people will probably be paying more for Medicare Supplement coverage, even though the plans will likely cover less.

In short, the ACA “clears the field” of competition for Medicare Supplement policy carriers in the next few years, which will make it easier for those companies to raise rates.

I have a Medicare Advantage policy and like it. How much longer can I keep it?

At least another year—through the end of 2013. And maybe longer.

Although some political partisans dismiss Medicare Advantage plans as a scheme hatched by “greedy” insurance companies, the fact is that more than 12 million seniors use them. And most of those people like them. As a result, there’s been some political hedging about just how quickly Medicare Advantage is being phased out. Originally, cuts were supposed to begin in 2013—which would mean insurers would raise rates and possibly stop offering the plans, as of the upcoming Annual Enrollment Period which begins in mid-October 2012.

A few weeks before the U.S. presidential election.

So, the HHS recently announced that it would move money from a fund designed for “demonstration projects” to replace the first phase of cuts in Medicare Advantage funds. This last-minute shift of approximately $8 billion means there will be no effect on the plans through the coming year. As one pundit has noted, the move allows the current administration to “take credit for a popular program [they] really want to kill.”

The long-term prospects for Medicare Advantage under the ACA are still grim. By the time the Annual Enrollment Period for 2014 comes around, it’s likely that the plans will require out-of-pocket payments from consumers to sustain even their limited services—which effectively defeats the purpose of a managed-care-style plan.

So, am I better off moving to a Medicare Supplement package this fall?

Not so fast. Some members of congress are concerned that Medicare Supplement packages aren’t a great deal for consumers and have proposed bills requiring insurance companies that write Supplement coverage to meet higher medical loss ratios (MLRs), the percentage of premium dollars that go toward medical care as opposed to overhead and marketing costs.

But industry spokespeople have said that higher MLR standards could force carriers out of the market and make a hash of existing coverage.

…and, of course, there’s always the chance that the U.S. Supreme Court will overturn the ACA—returning the entire debate over Medicare Supplement packages and Medicare Advantage plans back to where it was several years ago. At that point, Medicare Advantage plans seemed to be in the growth position.