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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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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

 

  • Ways to save money on Medigap policies (1 of 2)

    A Medigap policy is the most expensive kind of Medicare supplemental coverage. If you enroll in a comprehensive Medigap plan when you turn 65, you’ll probably pay almost $100,000 in premiums if you live to be 90. And that does not include your Part B premiums, prescription drug costs, and outlays for services that Medicare does not cover.

    Concerned about Medigap policies’ sizable costs, retirees have instead been choosing Medicare Advantage plans, most of which have low premiums. A decade ago, two million more people were enrolled in Medigap policies than in Advantage plans. But today seven million more people have Advantage plans than have Medigap policies.

    To see how quickly Medigap policies have lost market share, compare their growth rates to those of Advantage plans. Medigap enrollment has increased at an average rate of 3.5% a year since 2011, or at about the same rate that Medicare’s total enrollment has grown.

    But during that period Advantage plan enrollment grew almost 10% a year, and last month the Kaiser Family Foundation reported that one-third of all Medicare beneficiaries are enrolled in Advantage plans.

    Still, despite their high costs Medigap policies have several things going for them, and in some cases they may be be your best options. They do not have networks, which means you can see virtually any doctor you want to. You can go to the Cleveland Clinic or to Johns Hopkins Medicine without wondering whether you will be covered. And if you see several doctors, you will have a much easier time of it with a Medigap policy than in an Advantage plan.

    Another desirable feature of these policies is that Medicare and not an insurance company determines whether a medical service will be covered. That’s a good thing if you’re in need of an expensive or innovative treatment. Medicare is more lenient than insurance companies in approving medical services. Something as routine as getting a second opinion can occasionally be challenging in an Advantage plan, but Medicare almost always covers second and often third opinions. And when Medicare covers a medical service, Medigap insurers are required to do so also.

    There are also times when your only logical choice will be a Medigap policy. If you live in a rural area, there may be only a few Advantage plans available, none of which meet your needs. Even if you live in a large metropolitan center, you might find that your doctors do not belong to any Advantage plan networks. Or that the one plan that does have all your doctors in its network also has a substandard quality rating from Medicare or else exorbitant costs for the prescription drugs that you take.

    If you decide to get a Medigap policy, there are several ways that you may be able to keep your costs down. Here are some suggestions:

    Choose a Medigap plan that matches your health needs.

    There are 10 Medigap plans – 11 if you count the high-deductible version of Plan F as a separate plan. Their names are letters of the alphabet – Plan A, B, C, and so on through Plan N (Plans E, H, I, and J were discontinued in 2010). And there’s the high-deductible version of Plan F.

    Throughout their retirement, people typically keep the Medigap policy that they choose they first enroll in Medicare. It’s only prudent, then, to give some thought to the plan you choose.

    Four of the plans are very comprehensive and consequently expensive. Plan F is the most comprehensive of any Medigap plan, with Plan C being slightly less so. The only difference between the two is that Plan F covers excess charges by doctors who do not accept assignment. These two plans qualify as first-dollar coverage, i.e., you have complete coverage for all of Medicare’s gaps beginning with the first dollar.

    Insurance agents often steer retirees to Plan F because it generates the highest commissions. According to a blog posting last February by the staff of the Medicare Payment Advisory Commission, more than 70% of all Medigap policyholders had either Plan F or Plan C during the most recent year surveyed. These two plans will no longer be sold beginning in 2020, although people who already have either of these plans at the start of 2020 may keep them.

    Should you get one of these four comprehensive plans? The reason to buy insurance is to protect yourself from large losses. You’re almost certainly spending more than you need to when you buy insurance that pays for the small, predictable expenses that a comprehensive plan covers. That’s why financially savvy consumers do not get homeowners or auto insurance that has a zero deductible. They understand that the cost of eliminating the deductible outweighs the benefits.

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