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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 Advantage plans reach for the stars – quality stars, that is (2 of 2)

    Managed-care plans have always had an image problem. That’s especially true of HMO’s, whose restrictions and coverage denials have made them easy to caricature. There’s even a book of HMO humor. A sample joke: “It’s the 98% of HMO’s that give the rest of them a bad name.”

    But that may no longer be the case for Medicare Advantage plans, 66% of which are HMO’s and another 26% PPO’s. Since 2012, these plans have been able to earn generous bonuses if they provide their plan members with high quality medical care. Plans are judged on 47 weighted measures to determine their overall quality — 32 of the measures are for medical care and 15 for prescription drug coverage.

    An example of a quality measure is the frequency with which a plan monitors blood sugar levels for people who have diabetes. If a plan fails to monitor a high percentage of its diabetic patients, it receives a low score on that measure.

    After it has assessed an Advantage plan’s quality on all of the measures, Medicare rates the plan on a five-star scale. If a plan gets a rating of four stars or higher, the following year it is awarded a bonus of about $500 for each enrollee. Thus a highly rated Advantage plan that has 10,000 enrollees will receive approximately $5 million a year in bonus money. But if that plan’s quality rating dips below four stars – perhaps because it has skimped on medical care – it will no longer receive bonuses.

    For large plans, the bonuses can be substantial. Kaiser Permanente has more than one million members in its five-star rated Senior Advantage plans in California, and that translates to roughly $500 million in bonuses. With so much at stake, insurance companies are focused on getting ratings of four stars of higher. And their increased attention to quality is showing results.

    This year 179 Advantage plan contracts are receiving bonuses – a noticeable improvement over the 127 contracts that received bonuses in 2013 (one contract typically includes several Advantage plans). And this year’s average quality rating for all Advantage plans is 4.04 stars, compared to an average of 3.71 stars in 2013.

    In some cases plans are able to improve their quality without making significant expenditures. Earlier this year a Kaiser Health News article described how Vantage Health Plan, a 16,000-member Advantage plan in Louisiana, purchase a $10,000 mobile ultrasound unit so that it could provide bone density screenings for elderly women in their homes.

    With its new mobile unit, Vantage was able to improve its screening rate to 71% of its eligible women members in 2015, which was more than a five-fold improvement compared to its 13% rate the previous year. Moreover, the higher screening score enabled Vantage to raise its overall rating from 3.5 stars to 4 stars, making it eligible to receive $8 million in bonuses.

    The widespread improvement in ratings is good news for retirees. It means that they are likely getting better medical care than they did just a few years ago. Another plus for people who are enrolled in Advantage plans is that the plans are required to spend their bonuses on extra benefits, giving retirees better coverage that they would otherwise have.

    Plans do not mind re-investing their bonuses in additional benefits, which will attract new enrollees and increase profits. One reason that many Advantage plans have been able to continue offering zero-premium plans with no deductibles – during the same period that Medicare’s subsidies to the plans have been reduced – is that the re-invested bonus money makes it possible for the plans to keep their costs low.

    Instead of paying bonuses, why doesn’t Medicare simply require plans to meet certain quality standards? That’s the approach that was used, more or less, during the 25 years before the bonuses began. Although it was effective to a certain extent, it meant that insurers were more intent on meeting minimum standards than they were on aggressively improving quality.

    Here it’s interesting to note the contrast between Advantage plans and stand-alone prescription drug plans (PDP’s). Both types of coverage are rated for their quality by Medicare, but PDP’s do not receive bonuses. And possibly because they do not have a financial incentive to get high ratings, PDP’s have shown less improvement than have Advantage plans.

    Even so, the Advantage plan quality rating system is not without its flaws. In January Medicare sanctioned health insurer Cigna for multiple problems in its Advantage and PDP plans, even though six of Cigna’s 14 Advantage plan contracts were rated four stars or higher. As a consequence, Cigna cannot enroll new members until the problems have been resolved to Medicare’s satisfaction, which will probably be sometime next year. And in March, Humana was assessed a $3.1 million penalty for its “systemic failure” to adhere to Advantage plan and PDP requirements.

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