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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


  • Re-examining your Part D coverage should be a priority during Medicare's open enrollment

    It’s time again for Medicare’s annual open enrollment period, which runs from October 15 through December 7. In most cases it is the only time of year when people with Medicare can change their health coverage.

    If you have Medicare and have time to check only one thing during open enrollment, it should be your prescription drug coverage, the area where out-of-pocket costs are rising fastest. Last year the average Part D stand-alone plan premium jumped 13%, the largest increase since 2009 according to a report by the Kaiser Family Foundation.

    In addition, the largest premium hikes were in the most popular plans. The 3.5 million member AARP MedicareRx Preferred plan increased its premiums 21%, while two other plans, each with more than one million members, raised their premiums by 25% (the average premium increase for 2017 stand-alone plans has not yet been released).

    The steep rise in prescription drug costs is relatively recent. Prior to 2013, drug costs were not a major concern for most retirees, with increases averaging less than 3% a year from 2006 through 2012. But in 2013 the prices for more than 600 prescription drugs used by Medicare beneficiaries went up by an average of 9.4%, according to AARP’s Rx Price Watch report. And since then, the annual increases in drug prices have averaged in the double digits.

    Brand-name drugs have been the driving force behind the price surge. Although they account for fewer than 20% of all prescriptions, brand-name drugs heavily influence overall drug spending patterns, costing eight times as much as generic drugs, on average. And just one specialty drug, which is the most expensive type of brand-name drug, can add several thousand dollars a year to a retiree’s out of pocket costs.

    Generic drugs, in contrast, have had relatively benign price increases of less than 3% a year since 2006. Even that trend, however, may be starting to turn the other way, according to another AARP study last year.

    More than 40 million Medicare enrollees have Part D coverage, and their exposure to high drug costs depends partly on the type of plan they have. Those fortunate enough to have employer-sponsored Part D plans usually have the best drug coverage.

    In employer plans, out-of-pocket spending for prescription drugs is fairly stable since the employer typically screens out weaker coverage and also pays a portion of the premium. More important, employer drug plans typically have out-of-pocket limits, whereas other types of Part D plans have only catastrophic coverage limits.

    Most Medicare Advantage plans include Part D coverage that is similar to the coverage in Part D stand-alone plans. But unlike stand-alone plans, Advantage plans can smooth out spikes in drug costs by re-directing a portion of the monthly payments for medical benefits that they receive from Medicare.

    The most volatile type of Part D coverage is the stand-alone plan, and that’s where the payoff from yearly re-evaluations is likely to be greatest. One study published in 2015 found that during a six-year period, 80% of the people who re-examined their stand-alone drug coverage were able to save an average of $728 by changing to different plans. And earlier studies found even higher percentages of people in overpriced stand-alone plans.

    In an analysis of the wide pricing swings in Part D stand-alone plans, Kaiser Family Foundation researchers concluded that many people in Part D stand-alone plans could save money by re-evaluating their coverage – sometimes thousands of dollars – by changing plans. But despite the fact that the majority of people in stand-alone plans pay more than they need to, only 13% of them switch coverage each year, according to a study that looked at four years of enrollment records.

    Here are three reason people give for not re-evaluating their drug coverage each year, none of them valid, and also suggestions for finding the best coverage.

    1) I don’t need to re-evaluate my plan this year because last year I switched to the lowest cost plan for the drugs I take. Last year’s lowest-cost plan for your drugs will probably not be this year’s lowest-cost plan. Plans change their premiums, benefits, drug formularies and pricing tiers yearly. When a plan takes a drug that is in Tier 2 this year and moves it up to a Tier 3 drug next year, it adds several hundred dollars a year to your co-payments.

    One study of 25 people enrolled in stand-alone plans found that if they remained in the same plan for two years straight, 22 of them would have paid more than they needed to in the second year. The amounts they saved by switching to a lower-cost plan ranged between $276 and $562.

    The only way to find the lowest-cost plan is to do a drug plan comparison (or have someone do it for you) using the Medicare Plan Finder tool. It crunches the numbers – premiums, deductibles, co-payments, and co-insurance payments – to find the plan that has the lowest total costs for a given set of drugs.

    2) I do not need to re-evaluate my drug coverage since my plan has low premiums. If you do not take any prescription drugs, you should go with the plan that has the lowest premiums. But even if you take only one drug, a low-premium plan may not be your lowest-cost option.

    As an example, the lowest-premium national stand-alone plan in 2017 is the Humana-Walmart Rx plan with a $17 monthly premium. But if you use the Advair Diskus inhaler, an asthma drug, and it’s the only drug you’re using, you will pay $372 more for monthly refills in the Humana-Walmart Rx plan than if you were in the First Health Part D Value Plus plan, whose $42.30 monthly premium is more than twice that of the Humana plan’s.

    And if you get mail-order refills for the Advair Diskus, the least expensive plan is AARP Medicare Rx Saver Plus plan, which has a $33.40 monthly premium but will save you $193 a year compared to lower premium Humana-Walmart Rx plan.

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