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Healthy people pay 16% too much for their Medigap policies and unhealthy people pay twice as much as they should. That’s what an economist from the University of Pennsylvania found in a recent analysis of the difficulties people encounter in buying Medigap policies. People usually have to answer health-related questions before being told how much the premium will be. And health problems will usually result in higher premiums. There are only two exceptions: 1) during the 6-month period after someone first enrolls in Medicare, insurance companies cannot medically underwrite Medigap policies, and 2) a few states have community-rating laws prohibiting health-dependent premiums. This paper found that after the initial six month period has passed, people typically do not buy Medigap policies from the lowest-premium insurer because each company has its own underwriting standards and it is time-consuming to get multiple quotes

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Medicare beneficiaries spend 14% of their incomes for health care, according to an analysis by the Kaiser Family Foundation. That’s nearly three times the percentage that people younger than 65 pay. Even though the overall average is 14%, there’s substantial variation among age groups. The youngest seniors ages 65-69 spend only 11.5% of their budgets on health care, while those ages 75-79 spend more than 16% of theirs. The higher percentage for older seniors is because as a group they use more medical services and have lower incomes than younger seniors. Research also found that almost two-thirds of costs are for health insurance premiums. The second largest component is cost-sharing for medical services, which represents 18% of seniors’ health care costs. The findings were based on 2012 data.

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The AARP Public Policy Institute issued a report indicating that healthcare costs are consuming ever-larger portions of middle-class household budgets. The report noted that one-half of people ages 65-69 spend more than 11% of their incomes on health care, and that more than one-half of those ages 80-84 spend 23%. The report was written by Harriet Komisar of Georgetown University. Link to the report.

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Medicare Advantage plans’ quality ratings may be having a positive effect on seniors’ enrollment choices, according to a study published in JAMA, the journal of the American Medical Association. The study’s authors examined the choices of more than 950,000 first-time Advantage plan enrollees and another 320,000 people who switched plans. They found that a one-star higher rating translated to a 9.5% greater likelihood that someone would choose a plan. Thus people were 19% more likely to enroll in plan with a five-star rating than a plan with a three-star rating. Link to abstract of the study.

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A March 2013 article in the Yale Journal of Health Policy, Law, and Ethics examines the reasons for the continuing decline in employer retirement healthcare coverage. The authors point out that employers often trim health benefits for retirees rather than for current workers because younger workers might leave for jobs with better health coverage. Moreover, many large industries (think manufacturing) have downsized to the point that retirees heavily outnumber current workers, incentivizing firms to cut health benefits for retirees. Link to the article.

Not counting premiums, five percent of Medicare enrollees paid more than $5,000 in 2009, according to Congressional testimony by Glenn Hackbarth, Chairman of the Medicare Payment Advisory Commission (MedPAC). Hackbarth recommended re-designing Medicare’s benefits. Most seniors would have less out-of-pocket risk but would pay more for some services in the MedPAC proposal. Hackbarth said the proposed redesign is actuarially equivalent to today’s design. Link to the testimony.

Managing Medicare’s Costs

  • Healthy people can save money with less comprehensive Medigap plans

    When people first enroll In Part A and Part B of Medicare, they have a one-time opportunity to purchase a Medigap policy without having to disclose pre-existing conditions. But this opportunity goes away after six months.

    There are only four states where the six- month rule does not apply — Connecticut, Maine, Massachusetts, and New York. In the other 46 states, when people have health problems, even minor ones, they may be charged higher premiums if they try to get a Medigap policy after their first six months of enrollment in Part A and Part B. And if they have serious health issues, they will be denied coverage.

    That’s why people in poor health who do not have employer retiree coverage will almost always get Medigap policies when they first enroll in Medicare – it may be their only chance. Those in good health, on the other hand, may enroll in Advantage plans to save money. And in so doing, they accept the risk — probably small — that they will not be able to get a Medigap policy later.

    Except for their high costs, Medigap policies are the optimal coverage for older retirees who do not have employer plans. The most attractive feature of Medigap policies is that they do not have networks and are accepted by all Medicare providers. As people age, the flexibility in the choice of doctors and other providers can become increasingly important, with older retirees more likely to see several specialists.

    In contrast to Medigap policies, Advantage plans have provider networks. And as people age and use more medical services, there may not be a plan network that includes all their doctors or that includes an advanced treatment center. But if people with Medigap policies develop serious illnesses and want to go to the Mayo Clinic, Johns Hopkins or other large state-of-the-art clinic, they will be covered.

    While it’s true that Advantage PPO plans include some coverage for out-of-network services, patients’ costs may rise sharply when they go outside the network. Most Advantage PPO plans charge between 30% and 50% of the cost of out-of-network office visits and treatments. On top of that, many Advantage PPO have out-of-pocket limits as high as $10,000 when out-of-network services are included.

    Another selling point for Medigap policies is that insurance companies do not make the coverage decisions. Instead Medicare, which has been compared to an overly permissive grandparent, determines whether a treatment or procedure will be covered. And if Medicare covers it, the Medigap policy is required to cover it, up to the policy limits.

    With Advantage plans, though, insurance companies do make many coverage decisions. Although they are required to cover the same services as traditional Medicare, Advantage plans are more likely to restrict coverage in various ways, especially for expensive treatments.

    The dilemma for many new retirees, then, is whether to get a high-priced Medigap policy or to enroll in an Advantage plan and assume the slight risk of not being able to switch to a Medigap policy later when they may need it.

    A middle path for someone in good health is to get a less expensive, less comprehensive Medigap plan that nevertheless has good benefits. Of the ten Medigap plans, there are three that have substantially lower premiums and that cover all of Medicare’s services except for the Part A and Part B deductibles. The tradeoff is that these plans all have higher out-of-pocket risks than the comprehensive plans.

    When comparing Medigap plans, it’s helpful to remember that Medicare is the first or primary payer and covers most of the costs. The Medigap policy is secondary or supplemental coverage, and depending on the plan, it pays some, all, or none of the remaining balance. As an example, Medicare pays 80% of the cost for most medical treatments, and a Medigap plan will pay for some or all of the 20% balance. Since Medicare picks up most of the tab, the risk in the less comprehensive plans is smaller than people may initially realize.

    In the chart below, these three plans are compared with the standard Plan F, which is the most expensive Medigap plan.

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