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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


  • Open enrollment is one of the few times that you can reduce your health care costs (2 of 2)

    First fact: most people who have Medicare ignore its annual open enrollment period, which runs from October 15 through December 7. Second fact: most of them would save money if they re-evaluated their coverage and switched to lower-cost plans when it made sense to do so.

    There are only 25 or so times during retirement when you have the chance to control your health care spending. Two of these occur, one after the other, when you first enroll in Medicare. The rest of them take place during Medicare’s annual open enrollment periods. Aside from those times, there may not be much you can do to manage your health care costs.

    The first time, of course, is when you enroll in Part A and Part B. Here your objective is to avoid a costly mistake. Some 700,000 people are now paying lifetime late-enrollment penalties because they missed one or more deadlines. Usually that occurs because they didn’t understand Medicare’s sometimes confusing enrollment rules. In rare cases it’s because people did not want to start paying Part B premiums and thought they could get away with delaying their enrollment.

    There’s expert assistance to help you successfully navigate this process. One resource is Social Security (800-772-1213), which will verify your eligibility for Medicare and enroll you in Part A and B. And every state has one or more Medicare counseling agencies, whose telephone numbers you can find by calling 800-MEDICARE. By touching these bases, you should have no problems getting your initial Medicare enrollment right. The good news is that this is a one-time event that you won’t have to worry about again.

    The second time occurs shortly after you enroll in Part A and Part B. That’s when you choose your Medicare supplemental coverage. If you are like most seniors, once you choose this coverage you will stick with it throughout retirement. Thus if you decide to buy a Medigap policy, you will probably keep that policy and remain with the same insurance company that sold it to you for the rest of your life.

    That’s why it’s important to think longer term about this initial choice. Can you afford to purchase Medigap Plan F given that if you live another 20 years, you will pay close to $75,000 in Medigap premiums or more than $95,000 if you live another 25 years? Or on the other hand, are you willing to remain within the network confines of an Advantage plan, which may become increasingly difficult to do as you grow older, see additional specialists and use more medical services?

    After you have enrolled in Medicare and chosen your supplemental coverage, it’s likely that the only other times that you will have much control over your health care spending are the Medicare annual open enrollment periods. You will have 25 of these if you enroll in Medicare at age 65 and live to age 90.

    In theory, during retirement each open enrollment period is more important than the previous one. That’s because health care costs increase every year and because people go to their doctors more often as they age. As a result, the financial stakes of ignoring open enrollment may be slightly higher this year than they were last year, but not as high as they will be next year.

    When you re-evaluate your coverage, sometimes there are only one or two things you need to consider. If you have a Medigap policy and your premiums seem too high, you can call other insurance companies to see if you can get a lower premium, although in most states you will have to answer questions about your health before you get a quote. Most insurance companies will sell you a Medigap policy at any time of year, so that if your current insurer raises your premiums by 10% next summer, you can shop around for a better deal.

    If you have a stand-alone prescription drug plan, during open enrollment you should find out how much you will pay for your Rx drugs next year if you remain in your current plan and whether you can save a substantial amount by switching to a different plan. You can find that out by making one telephone call, as described in last month’s blog.

    If you have a Medicare Advantage plan, there are several criteria you may want to consider before switching to another Advantage plan. For starters, it’s good to be able to answer two questions: 1) if you stay in your current plan next year, will you pay much more for the prescription drugs you take than you would in other Advantage plans? and, 2) are all of your doctors in your plan’s network.

    In an Advantage PPO plan you will have some coverage when you go outside the network, but depending on the plan you may pay between 30% and 50% of the total cost. If the answer to both questions is “yes,” look for a lower-cost alternative – either a different Advantage plan or a Medigap policy combined with a stand-alone drug plan.

    Another criterion you may want to consider is your Advantage plan’s quality rating. Plans are scored on a scale from one to five stars, with five being best. In one recent year, 14% of the people in Advantage plans that had quality scores lower than three stars changed to other plans. That’s compared to a much lower 9% change rate for people in plans that had a 4 or 4.5 star rating, and to a miniscule 3% change rate among people in plans with five-star ratings, according to a recent analysis of Advantage plan switching behahavior.

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