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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

  • What Medicare does not cover

    Medicare’s history has been one of gradually improving coverage. One reason is that new benefits have sometimes been needed to keep pace with medical advances. When studies showed that continuous glucose monitoring devices help diabetics control their blood sugar levels, Medicare said it would cover them.

    In other cases, benefits have been added to respond to an emerging need. In 2003, millions of retirees did not have any prescription drug coverage. And many seniors had stopped taking one or more of their medications because they could not afford them. That unmet need led to the creation of Medicare’s prescription drug benefit – Part D.

    Moreover, Medicare can sometimes cut costs by enhancing its benefits. The Affordable Care Act provided free preventive tests and screenings for Medicare beneficiaries because Congress believed that it would save money in the long run.

    All told, there have been hundreds of upgrades to its coverage since Medicare began in 1965. But with a few notable exceptions, most have been minor changes. And there is still a fairly long list of medical services – from acupuncture to wisdom teeth extractions – that Medicare does not cover.

    It can be helpful for retirees to know which services are not covered by traditional Medicare, and whether there are other ways to get coverage, perhaps in a Medicare Advantage plan. Here is a list of frequently used services that are not covered by traditional Medicare:

    Long-Term Care (LTC). Medicare does not cover custodial care, which is care for individuals who need help with the activities of daily living. More than one-third of people will need long-term care at some point, according to statistics published by Morningstar. And that estimate does not include unpaid long-term care that’s provided by family members. Medicare does, however, cover medical care for people in nursing homes and assisted living facilities. And it covers stays in skilled nursing facilities following hospitalizations.

    If at some future point you require long-term care in a nursing home, there are three possible ways to pay for it, and many retirees use a combination of all three:

    Pay out of pocket. A ballpark estimate is that a semi-private room in a long-term care facility costs $100,000 a year, although that number may vary quite a bit depending on the level of care and the state you live in. To get a more accurate cost estimate for the state you live in, check out Genworth’s 2019 Cost of Long-Term Care Report.

    The average nursing home stay is just over two years, but the median stay is less than six months. That means there are a large number of stays that last a few weeks or months, and a small number that last several years.

    Rely on LTC insurance to pay some or all the costs. Only 7.5 million people have LTC policies today – that’s compared to more than 50 million people who are 65 and older. And even though the total number of insured lives has slowly been increasing, the number of new LTC insurance policies sold each year has been declining.

    You can also invest in an annuity or life insurance policy that has a long-term care rider. And if you never need long-term care, the life insurance or annuity will keep their full value. The downside is that if you do have a LTC stay, the payout will be less than with traditional LTC policies.

    Qualify for assistance from Medicaid. Six out of ten nursing home residents count on Medicaid to pay some or all the costs for their long-term care. Even those who have LTC insurance will sometimes exhaust their benefits and spend their resources down to the point that they qualify for Medicaid. Unfortunately, the eligibility rules for Medicaid LTC assistance are not only complex, but they are different in each state.

    After long-term care, the next largest coverage gaps are for dental, vision, and hearing care. These three types of care are covered by most employer retiree plans, and they may be the next major additions to Medicare’s coverage.

    In December of 2019, the House passed a resolution that will add Medicare benefits for these services, but the Senate has yet to vote on it (and may not do so). Below are summaries of traditional Medicare’s current and very limited benefits for these three services.

    Dental care. Medicare does not cover routine dental care or dentures. But it does cover dental work if the teeth or jaw have been damaged by a disease or in an accident. Elsewhere, most employer retiree plans include dental coverage, as do 60% of Medicare Advantage plans.

    The Kaiser Family Foundation reported in a 2019 study that more than 10 million enrollees had access to dental care through their Advantage plans (some plans charge an additional premium). Before enrolling in an Advantage plan to get dental benefits, make sure that your dentist will accept the plan’s coverage.

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