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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 $2,500 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 $125,000 a person. Fidelity Investments, for example, estimates that a 65-year-old couple who retire in 2017 and who do not have an employer supplement will pay $275,000 for health care during their retirement. 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 $2,500 on health care this year and that amount grows by 4% a year, in 25 years they will each have spent more than $100,000.

Recent articles and studies about retirement healthcare costs


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Fidelity Investments’ most recent estimate is that a 65-year-old couple retiring in 2017 will pay $275,000 for health care during their retirement. This estimate, which Fidelity released in late August, is almost 6% higher than last year’s $260,000 number. Since Fidelity’s first began estimating retirement health care expenses in 2002, costs have grown by more than 70%. The estimates assume that the retiring couple does not have employer coverage to supplement Medicare. Life expectancies are that the husband will live to age 86 and the wife to age 88. Those life expectancies are based on the Society of Actuaries 2016 mortality tables. Here’s a link to Fidelity’s 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


  • Finding ways to save money on Medigap policies (2 of 2)

    Medigap policies are the easiest-to-understand type of Medicare supplemental coverage. That’s because they almost never change their benefits. Six of the ten Medigap plans have the same benefit designs that they had 25 years ago — other than for a few tweaks that resulted from changes in Medicare’s benefits. And the coverage of the other four Medigap plans has not changed since they first came on the market in 2010.

    While their coverage is easy to understand, Medigap policies’ pricing is confusing. Here’s an example: if you are a 65-year-old San Francisco resident enrolling in Medigap Plan N, for instance, you may pay as little as $1,117 a year or as much as $1,807 a year, according to quotes from CSG Actuarial.

    Thus if you buy your policy from the most expensive insurer, you’ll pay 62% more than if you choose the least expensive company – even though the coverage is identical.

    Why do premiums vary so much? One answer is that insurance companies know that some retirees do not shop around before buying a policy. A handful of insurers may intentionally overprice their Medigap policies because they are willing to sell fewer policies so long as the ones they do sell have hefty profit margins.

    Another reason is that smaller, less well-known companies may have to offer larger commissions to entice insurance agents to sell their policies, and that added cost is reflected in steeper premiums. Still another reason is that when insurance companies are losing money on their Medigap policies, perhaps because of past underwriting errors, they have no choice but to hike premiums.

    Companies use one of three different rating methods when they set premiums. The most common one is the attained-age rating, which raises your premiums by about 3% for each additional year of age in addition to an annual increase to account for for health care inflation. Attained-age policies are usually the best deals for young retirees but can be pricey for older people.

    The issue-age rating method, on the other hand, raises premiums to stay even with medical inflation but does not adjust them for age except when the policy is initially sold. Issue-age policies usually have higher premiums for younger retirees since future age increases have already been priced in. But issue age-policies should be less expensive for older retirees who purchased their policies years earlier. Six states require insurance companies to use issue-age ratings – Arizona, Florida, Georgia, and Idaho. Missouri, and New Hampshire.

    The third method uses a community rating approach in which everyone pays the same premiums regardless of age or health. Like the issue-age approach, community ratings result in premiums that are expensive for younger retirees but relatively affordable for older people. The popular UnitedHealthcare (UHC) policies endorsed by AARP use a modified community rating in most states, although they will sometimes set their premiums higher or deny coverage to people who want to acquire a Medigap policy after their initial enrollment period has passed.

    So that their premiums will be competitively priced for younger retirees, UHC modifies its community rating by offering discounts of 3% a year for each year that the policyholder is younger than 75. This results in a 65-year-old getting a 30% discount, a 66-year-old a 27% discount, and so on until at age 75 the discount has vanished. Eight states require Medigap policies to be community-rated – Arkansas, Connecticut, Maine, Massachusetts, Minnesota, New York, Vermont, and Washington.

    In trying to protect yourself from sharp increases in premiums, it can helpful to know which ratings method an insurer uses. As an example, if you find an issue-rated policy that has lower premiums than an attained-age policy, it is expected to have lower premium increases over the long term than will the attained-age policy.

    But there are other factors which also play key roles in future premium increases. Companies that have conservative underwriting rules and low sales costs will have lower premium increases regardless of which ratings method they use. And state insurance regulators also play a role. The Florida Office of Insurance Regulation, for example, places caps on Medigap policies’ yearly premium increases.

    Here are suggestions about ways you may be able to save money when you are buying a Medigap policy:

    Compare premiums from at least three insurance companies. But which three companies do you call, since in many states 30 or more insurance companies sell Medigap policies? As a start, you can look at your state insurance department’s online premium comparisons for Medigap policies, which can be found at the bottom of this page.

    Most states list each company’s premiums for individuals of various ages (age 65, age 70, etc.) as well as its toll-free number. Even though some states do not regularly update their premium comparisons, they will give you an idea of the companies most likely to have lower premiums.

    The objective is not necessarily to buy your policy from the company that has the lowest premiums, but to buy from a company that has reasonably low premiums and that meets your other criteria, e.g., it is a large, well-known insurer.

    If you live in one of the few states that do not have the online comparisons, you can go to the Medicare web site to find a list of companies selling Medigap policies in your state. you might use the Medicare web site’s list of companies here. The Medicare web site does not show insurance companies’ premiums but it does list their toll-free numbers.

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