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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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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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Healthy people pay 16% too much for their Medigap policies and unhealthy people pay twice as much as they should. That’s what an economist from the University of Pennsylvania found in a recent analysis of the difficulties people encounter in buying Medigap policies. People usually have to answer health-related questions before being told how much the premium will be. And health problems will usually result in higher premiums. There are only two exceptions: 1) during the 6-month period after someone first enrolls in Medicare, insurance companies cannot medically underwrite Medigap policies, and 2) a few states have community-rating laws prohibiting health-dependent premiums. This paper found that after the initial six month period has passed, people typically do not buy Medigap policies from the lowest-premium insurer because each company has its own underwriting standards and it is time-consuming to get multiple quotes. The analysis can be downloaded here.


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Medicare beneficiaries spend 14% of their incomes for health care, according to an analysis in January 2014 by the Kaiser Family Foundation. That’s nearly three times the percentage that people younger than 65 pay. Even though the overall average is 14%, there’s substantial variation among age groups. The youngest seniors ages 65-69 spend only 11.5% of their budgets on health care, while those ages 75-79 spend more than 16% of theirs. The higher percentage for older seniors is because as a group they use more medical services and have lower incomes than younger seniors. Research also found that almost two-thirds of costs are for health insurance premiums. The second largest component is cost-sharing for medical services, which represents 18% of seniors’ health care costs. The findings were based on 2012 data.

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Medicare Money Matters

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  • Medicare Advantage plans are best suited for healthy people (1 of 2)

    When you enroll in a Medicare Advantage plan, you are making a wager that you’ll remain relatively healthy during the coming year. If you win, by the end of the year you may have saved as much as $2,000.

    That’s compared to the premiums you would have paid for a Medigap policy, the other type of supplemental coverage that’s available to you if you don’t have an employer plan.

    But if you lose the wager, you could wind up paying much more than you would for a Medigap policy. Even if you lose in one year, however, the odds are that you will save money over the longer term if you remain relatively healthy.

    The amount that you will save depends on the medical services you use and how often you use them. And if you are healthy, see only network doctors, do not go to them very often and do not get expensive treatments, you will likely save a substantial sum.

    Not everyone in an Advantage plan is healthy, to be sure. Some retirees in poor health may be stuck in Advantage plans either because they cannot afford a Medigap policy or because insurance companies refuse to sell them one.

    And in 23 states, disabled Medicare beneficiaries younger than 65 do not have a guaranteed right to buy a Medigap policy. That leaves many of them with no choice but to enroll in an Advantage plan until they turn 65 and can buy a Medigap policy without being screened for pre-existing conditions.

    But the vast majority of people in Advantage plans are in good health. According to Medicare’s Current Beneficiary Survey, almost three-fourths of seniors rate their health as excellent, very good, or good. That’s a huge pool of people to draw from. In the last decade millions of them have enrolled in Advantage plans during the last decade, a period in which total plan enrollment has tripled.

    Not surprisingly, Advantage plans design their benefits to appeal to people who are healthy. Some plans, for instance, include free health club memberships and wellness classes so as to attract physically fit enrollees.

    At least two Medicare Advantage plans, one in Florida and the other in California, now provide their members with a program called Walkadoo that, when linked to popular activity trackers like Fitbit and Jawbone, counts the number of steps that people take and calories they expend.

    Another example of how Advantage plans can design their benefits to attract healthy people are zero-premium plans. Because plans receive generous monthly payments from Medicare for each enrollee, they can make a profit without charging premiums.

    These capitation payments, as they are called, are adjusted for an enrollee’s age and health as well as for local medical costs. Thus Medicare might pay an Advantage plan $750 a month for a healthy 65-year-old and $975 a month for an older person who has a serious chronic illness.

    Zero-premium plans and other low-premium Advantage plans are similar to the high-deductible plans sold to younger people who are not yet eligible for Medicare. Both types of coverage are designed for healthy people, and both types give policyholders an incentive not to use medical services.

    The percentage of Advantage enrollees in zero-premium plans has remained relatively stable over the years. This year it is 49% and in 2010 it was 48%. The highest percentages were in 2012 and 2014, when 55% of Advantage plan enrollees were in zero-premium plans, according to a report by the Kaiser Family Foundation.

    Even though the percentage of people enrolled in zero-premium Advantage plans has remained fairly consistent, the risk-return tradeoff is increasingly being tilted to favor the plans. So that they can to continue to offer low premium coverage, plans have raised the amounts for co-payments and deductibles. And they have shrunk their provider networks to get rid of doctors who order too many medical services or who have high-cost patients.

    Out-of-pocket limits have also jumped. This year the average enrollee’s out-of-pocket limit is jusst over $5,200, with more than one-third of enrollees are in plans that have Medicare’s maximum $6,700 out-of-pocket limit.

    To illustrate how Advantage plans have shifted risk to seniors, this year’s average out-of-pocket limit is almost $1,000 higher than it was in 2011, according to the Kaiser Family Foundation. That equates to 3.9% average annual increases in out-of-pocket limits in the last five years. During the same period, though, Medicare’s per-beneficiary costs have increased at a much lower average annual rate of about 1.4%.

    While Advantage plans receive higher payments from Medicare for people with health problems, the payments may not cover the cost of care. For that reason, plans often look for ways to discourage unhealthy people from enrolling. A plan may, for instance, have the minimum number of oncologists in its network, making it likely that cancer patients will look elsewhere for coverage. Or it may have only one or two dialysis centers in its large service territory, requiring some patients to travel long distances for treatments.

    Last year a study published in the policy journal Health Affairs found that seriously ill people who used long-term care, skilled nursing care, and home care services had dis-enrolled from Advantage plans at very high rates. And two months ago a Kaiser Family Foundation analysis of Advantage plan networks in 20 counties found that, on average, only about one-half of area hospitals were in the plans’ networks. Also, among the plans located in areas that had a National Cancer Institute-designated center, only 41% of them had their area’s designated center in their networks.

    If you’re considering enrolling in an Advantage plan, do your homework. Among the things to consider are a plan’s costs for the prescription drugs that you take. If you enroll in a zero-premium or low-premium plan but wind up paying several hundred dollars more for your Rx drugs than you would in a higher-premium plan, you may want to consider other options.

    You should also try to find plans whose networks include all your physicians. What if the Advantage plan that you are considering is a PPO and one or two of your doctors are not in the plan’s network? You might decide to enroll anyway if you do not go those doctors often and you don’t get expensive tests and treatments when you see them.

    Remember, though, that some Advantage PPO plans require you to pay between 30% and 50% of the cost for out-of-network visits and treatments. And if the plan is an HMO, unless it’s an emergency you will likely have to pay the full cost of any out-of-network doctors’ office visits and treatments.

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