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Evaluating the costs and benefits of your Medicare choices

Because Medicare has substantial gaps in its coverage, people need some kind of supplemental insurance. There are four basic types:

  • Employer-sponsored retiree plans , including plans for retired career military and union workers
  • Medigap policies (which must be combined with Part D stand-alone plans)
  • Medicare Advantage plans
  • Medicaid

Usually people should look for the lowest-cost plans that meet their needs. If they have employer retiree coverage, for instance, they will usually have five or six options to choose among, some of which could be more comprehensive (and expensive) than they need. For those who do not have employer plans, the choices will be among the Advantage plans, Medigap policies, and Part D plans available in their areas.

It also helps for people to have a general idea of how much health care could cost them during retirement, since that may influence their choice of coverage at age 65. For those in good health, costs may be reasonable in early retirement. Thus a healthy 65-year-old who enrolls in a Medicare Advantage HMO plan may pay less than $2,200 a year in health care costs, including Part B premiums.

But in later years retirees tend to use more medical services and their costs often rise sharply. Over the course of a long retirement, they can easily spend more than $100,000 a person. Fidelity Investments, for example, estimates that a 65-year-old couple who retire in 2014 and who do not have an employer supplement will pay $220,000 for health care during their retirement. And Fidelity’s estimate is in today’s dollars, after taxes.

If nothing else, 65-year-olds might want to look at how much they expect to pay for health care this year and then increase that number by 4% a year over a 25-year-period — to age 90. If they spend $2,200 on health care this year and that amount grows by 4% a year, in 25 years they will each have spent almost $92,000.

Recent articles and studies about retirement healthcare costs


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A 65-year-old couple retiring in 2016 will pay $260,000 for health care during their remaining lifetimes. That estimate by Fidelity Investments does not include the cost of routine dental care, over-the-counter drugs, and long-term care. In making this estimate, Fidelity assumed that the husband will live to age 85, the wife to 87, and that they will not have an employer-sponsored plan to supplement Medicare. Each year since its initial estimate in 2002, Fidelity has updated its calculations to reflect current costs. Its 2002 estimate was $160,000, and since then the estimates have increased at an average annual rate of just over 3.5%. Link to press release.


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People who have Medigap policies use 24% more health care services than do people with other types of Medicare supplemental coverage, according to a study in the Journal of Econometrics. The primary reason for the extra use, the study’s authors found, is that many Medigap policyholders who are in good health use more medical services than they need to. They do so because their Medigap benefits are so comprehensive that there’s no cost for additional doctors’ office visits and treatments. The authors say that this creates a “moral hazard,” a situation in which people use more services than they should because there’s no cost in doing so. The authors based their findings on two large sets of Medicare records. Link to study abstract.


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It’s well known that health care spending rises as people grow older. But a new report indicates that there’s a widening gap between the cost of health care for a 65-year-old, for instance, and an 85-year-old. Based on an analysis of Medicare records over an 11-year period, the Kaiser Family Foundation’s The Rising Cost of Living Longer was published in January 2015. Among other things, the analysis found that Medicare per capita spending for 85-year-olds in 2011 was 2.5 times greater than for 65-year-olds. That is a bigger gap than in 2000, when the ratio was 2.3 times. The researchers also found that Medicare’s per capita spending for people ages 90 and older has grown at a faster rate than it has for younger beneficiaries. And while Medicare’s per capita costs are not the same as a senior’s out-of-pocket costs, the trend lines are similar.


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New studies have raised questions about the need to purchase long-term care, or LTC, insurance. In June of 2014 a team of Rand Corporation economists published an analysis, abstracted here, that was based on two decades of nursing home data. The analysis included interviews with decedents’ surviving family members about the duration of end-of-life stays, which are sometimes not accurately captured in nursing home records. The Rand economists concluded that while the probability of needing long-term care is greater than previously thought, the average length of stay is much shorter – just over one year. Then, using the Rand data, the Center for Retirement Research revised its model for the likelihood of needing long-term care, publishing the results in November, 2014. The authors said that the more recent data indicate that disability and the use of LTC are declining, and that the value of long-term care insurance is less than earlier believed since average stays are shorter and therefore cost less than previously thought.


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It’s hardly news that seniors are frequently perplexed by Medicare’s complex plan choices. But a recent report from the Kaiser Family Foundation provides specifics about how people cope with the confusion. The report is based on feedback from nine focus groups in four cities. In many instances people used a simple though not necessarily cost-effective method to select coverage. For instance, some said that they chose a plan because they were familiar with its name, e.g., AARP. Others selected a plan because their spouses were already enrolled in those plans. Most of the seniors in the focus groups said that they found the initial selection process so frustrating that they were reluctant to switch plans later, even though they might save money by doing so. And the few individuals who did switch coverage usually did so in order to continue seeing their doctor or because their plan’s drug costs spiked. The full report can be found here.


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Seniors’ out-of-pocket spending for health care declined slightly after the 2008 recession, according to research published in Health Affairs last month (May, 2014). Using Medicare’s definition, out-of-pocket spending does not include premiums for private health insurance – Medicare Advantage, Medigap, and employer plans – but does include Part B premiums. Seniors averaged paying $2,440 out-of-pocket for health care in 2010. That was four-tenths of a percentage point less than they had paid in 2008. But if you total payments from all sources including those from Medicare, the average cost of health care for a Medicare beneficiary 65 or older was more than $18,000 in 2010. That amount had grown an average annual rate of 4.1% since 2002. An abstract of the report is here.


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A May 2013 study sponsored by the Society of Actuaries found that a person who retires at 65 and lives 20 additional years will spend $146,400 for health care. The study also estimated that if someone retires at age 55, he or she will pay an additional $226,000 for health care ($372,400 total). The study used data from the Health Care Cost Institute, which has cost records for 1.2 million people enrolled in Medicare fee-for-service plans. The members of the Society of Actuaries help to set health insurance premiums for most plans. The press release summarizing the findings is at this link (where the full report can also be downloaded).

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Medicare Money Matters

A monthly blog


  • Medicare is raising the quality bar for Advantage plans

    There’s a fairly long list of things to consider before you enroll in a Medicare Advantage plan. The Medicare Rights Center, for instance, suggests that you know the answers to 24 questions before enrolling in an Advantage plan. And while going through so many questions takes time, it also reduces the chances of an unpleasant surprise later.

    One question that’s not on the Medicare Rights Center’s list is, “What is the quality rating of the plan that you are considering?”

    Medicare rates each Advantage plan’s quality on a scale between one and five stars, with five being best. When an Advantage plan earns a rating of four stars or higher, it receives a sizable bonus that by law must be used for additional benefits. And those extras, which may include lower premiums as well as some routine dental and vision care, attract new members.

    This year more than two-thirds of the 18 million Advantage plan members are in plans that have at least a four-star rating. Many of those people are doubtless attracted to these “bonus plans” because of the additional benefits.

    Another reason to select a bonus plan is that it’s likely to have better medical care. Plans that have a minimum four-star rating have shown to Medicare’s satisfaction that a high percentage of their patients are getting recommended preventive tests and that pre-existing conditions are being well-managed.

    Bonuses are relatively recent

    Medicare began rating plans on their quality in 2007, but the practice of giving bonuses, a provision in the Affordable Care Act, didn’t begin until 2012. In the early days of the the bonus program, Medicare’s approach was to grade the plans leniently, giving them leeway as they learned the ins-and-outs of the bonus program. That initial leniency included a three-year demonstration project that awarded bonuses to plans that had only average ratings.

    All along, though, the idea was gradually to tighten the grading standards. Now, six years into the bonus program, it’s becoming more difficult for Advantage plans to score well. This year’s average rating is lower than it was last year, the first time there’s been a year-over-year decline. And in 2017 there are 1.2 million fewer people in bonus plans than there were last year.

    Medicare’s heightened scrutiny is good news for most retirees, particularly over the longer term. Still, there will be many people whose benefits will be trimmed because their plans will no longer receive bonuses. All told, Advantage plans will receive about $500 million less in bonuses this year than they did last year, leaving some plans with no choice but to raise premiums and deductibles.

    With so much money at stake and the tougher grading standards in play, Advantage plans have a renewed focus on the quality of care they are providing their members. With an average bonus payment of $400 a year for each plan member, plans that have several hundred thousand members and that qualify for bonuses can be richly rewarded. This year Medicare will hand out more than $3 billion in bonuses.

    An indication of Medicare’s tougher grading standards was last fall’s downgrades of more than one-half of Humana’s four-star Advantage plans. In its comments following the downgrades, Humana said that the lower ratings were partly the result of Medicare’s raising its thresholds for measuring quality.

    Because of the lag between the date that Medicare releases the quality ratings and the time they go into effect, Humana won’t feel the impact until next year. But unless it is successful in its request for Medicare to reconsider the downgrades, the insurer will see its bonuses reduced by hundreds of millions of dollars in 2018.

    Humana’s reduced ratings were noteworthy because they will affect so many people, with some 20% of all Advantage plan enrollees belonging to a Humana plan. And based on current enrollment, the percentage of Humana’s Advantage plan membership in bonus plans will drop from an estimated 78% this year to 37% next year.

    Ratings methodology

    Medicare’s quality ratings are based on specific measures, e.g., the percentage of a plan’s members who received their annual flu vaccinations. This year there are 44 measures for Advantage plans that include prescription drug coverage. Measures are weighted, with outcome measures being three times as important as process measures.

    The measures that Medicare uses are developed by the National Committee on Quality Assurance, the accreditation agency. NCQA’s metrics are used to track performance for 90% of the country’s insurance plans..

    Some measures relate to customer satisfaction, and the overall rating indicates not only how well a plan performs its clinical care but how a plan’s members feel about the plan. Is it responsive to members’ complaints? What percentage of members leave the plan each year?

    Bonuses give plans something besides costs to focus on

    Like other types of managed care plans, Advantage plans receive a monthly payment – a capitation payment — for each of their members. The payments are adjusted for the plan member’s age and health. A plan might receive $875 a month for a healthy 65-year-old and $1,100 a month for an 85-year-old who has a chronic disease.

    Quality bonuses run counter to managed care plans’ usual tendency to restrict care. Without the bonuses, many plans would concentrate solely on keeping their costs low since their revenue is largely predetermined.

    Moreover, if controlling costs is their only aim, plans can do it by reducing their responsiveness and quality of care.
    They can make it difficult for patients to get certain treatments, particularly if they are expensive ones. They can require referrals for routine visits to specialists and refuse to cover second opinions.

    But because the quality bonuses are generous, insurance companies understand that they can do more to enhance their profits by providing top-notch care than by restricting care.

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