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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


  • Ways to manage three important gaps in Medicare coverage

    When Congress designed Medicare’s original benefits more than 50 years ago, it chose not to cover dental care, routine vision care and hearing aids. That decision may have been financially shortsighted. The reason is that Medicare pays much larger amounts to treat serious illnesses caused or aggravated by the lack of dental, vision, and hearing coverage.

    A prime example is dental care. If Medicare were to pay 80% of the cost of an annual dental exam and a teeth cleaning, it would in many cases avoid substantial expenditures later. The Mayo Clinic says that untreated dental problems can lead to, among other things, cardiovascular disease and head and neck cancer — costly illnesses that Medicare does cover.

    For its part, routine vision care is essential to detect and treat eye diseases before they progress very far. While there are no cures for some eye diseases, early detection and treatment can slow their advance, reducing the need for costly treatments later. Harvard University ophthalmologists estimate that 40% to 50% of all blindness can be avoided or treated through routine exams and early detection.

    As for hearing aids, there’s mounting evidence that people with hearing loss are at an increased risk of having dementia. And health care costs for people with dementia are greater than for any other disease. Dr. Frank Lin, an otologist at Johns Hopkins University, is an expert on the relationship between dementia and poor hearing. Lin is the lead author of a six-year study of almost 2,000 seniors ages 75-84 that found that as people’s hearing worsened, they began to have substantially higher rates of cognitive impairment.

    Congress periodically debates whether to include dental, vision, and hearing aid benefits in Medicare’s coverage. In the last two years alone, five bills have been introduced to improve Medicare’s coverage of these three services, but none of them has made it out of committee.

    Given the focus on cutting Medicare’s costs, it’s unlikely that they will be covered in the foreseeable future. That leaves it up to seniors to find the best way to pay for these services. Here are some suggestions:

    Dental care

    Except for people who qualify for Medicaid, the only two ways for seniors to get subsidized dental coverage are from an employer retiree plan or a Medicare Advantage plan. But both types of coverage have trimmed their benefits in recent years, and a majority of retirees do not have any dental insurance.

    If you want to find an Advantage plan that has dental benefits, your best chances will be in plans that have quality ratings of at least four stars. That’s because Medicare pays quality bonuses to these highly-rated plans, and the plans in turn are required to reinvest the bonuses in extra benefits.

    A survey by the Kaiser Family Foundation found that Advantage plans that are rated four stars are higher are more likely to provide dental and vision coverage. Also, some Advantage plans offer supplemental dental and vision coverage for an additional premium.

    If you cannot get subsidized dental insurance, the other options are to purchase a stand-alone dental plan or to self-insure. One reason to buy a stand-alone dental plan is that you will be more likely to get preventive care. Otherwise, though, these plans are not great deals.

    One example of a widely sold stand-alone plan is the Delta Dental PPO Plan B. Marketed by AARP, this plan’s premiums vary by region. In Southern California, as an example, monthly premiums are $49. After you add the plan’s $100 deductible, your annual fixed costs – premiums plus deductible — are almost $700.

    But this plan has a maximum annual payout of $1,000. That doesn’t mean, however, that you have a potential $300 upside. You will make additional co-payments along the way to that $1,000 limit — 20% of the cost of dental exams, x-rays, teeth cleanings and fillings, and 50% of the cost of crowns, extractions, and root canals.

    This type of benefit design, which combines high fixed costs and a relatively low maximum benefit, is typical of stand-alone dental plans. It is almost impossible for people to come out ahead financially in one of these plans.

    The reason to buy insurance is to protect against large losses, and by that standard, stand-alone dental plans are not good insurance. Moreover, many of them have fine-print exclusions for certain procedures as well as waiting periods for expensive treatments, e.g., you must be enrolled in a plan for a minimum of six months to be covered for a root canal.

    If you decide to get a stand-alone plan, perhaps because it will encourage you to get preventive exams, ask your dentist for recommendations about plans that he or she accepts. Dental HMO plans will cost you less than PPO’s, where if your dentist is not in the plan’s network, co-payments can be as much as 40% higher than they are for a network dentist.

    Another option is to sign up for a discount plan, also called a dental savings plan. Here you pay an annual fee of, say, $150 in order to get bargain-basement pricing for many procedures. Some 60% of dentists are in these plans’ networks, according to Consumer Reports.

    Whatever you do, make sure to get your annual exams and teeth cleanings. Larry Coffee, founder of the Colorado-based Dental Lifeline Network, was quoted in a recent Health Affairs article about dental caare for older people as saying that “a cavity is not just a hole in your tooth, it is a bacterial infection.” The article also mentioned that one in five people 65 and older do not have any natural teeth.

    Vision care

    Medicare has good coverage for diseases of the eye, including tests and treatments for glaucoma, macular degeneration, and cataract surgery. But routine vision tests and prescription glasses are not covered with the exception of a set of corrective lenses following cataract surgery.

    Without insurance, eyewear is expensive. Many people buy their glasses at their eye doctors’ offices because it is convenient._ Consumer Reports_ says that people can reduce that cost as much as 40% by purchasing their eyewear at a discount store, and that Costco had the highest satisfaction scores in a survey of almost 20,000 people who had purchased eyewear. Other highly-rated stores were various independent shops and discounter Warby Parker.

    VSP is the largest provider of vision coverage — the initials stand for Vision Service Plan. It has almost 80 million members and a wide range of plans that offer discounts. But unless the VSP plan is sponsored by an employer, you may be able to get lower prices at a volume discounter like Costco or Sam’s Club.

    Hearing aids

    Medicare pays for certain audiology services if they are ordered by a physician or nurse practitioner to evaluate medical problems that may be related to hearing. Tests can be to determine the cause of tinnitus, balance problems and other ailments. Not covered, however, are routine tests to determine whether hearing aids are needed.

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