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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 $2,500 a year in health care costs, including Part B premiums.

But in their later years, retirees tend to use more medical services and take more prescription drugs. As a result, their costs often rise sharply. And over the course of a long retirement, they can easily spend more than $150,000 a person. Fidelity Investments, for example, estimates that a 65-year-old couple who retire in 2019 and who do not have an employer supplement should have $285,000 in today’s dollars set aside for health care during their retirement.

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 $2,500 on health care this year and that amount grows by 4% a year, in 25 years they will each have spent more than $100,000. But if they take just one brand name drug, their annual costs will likely increase by more than $1,000 a year.

Recent articles and studies about retirement healthcare costs

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A study published in the April 2019 issue of Health Affairs found that in recent years Medicare Advantage plans have increased the number of primary care doctors in their networks. The study addresses a longstanding concern that many Advantage plans are shrinking their provider networks. These so-called narrow-network plans make it more difficult for seniors to find plans that will cover them when see their physicians. But the study found that by the end of 2015 fewer than two percent of all Advantage plans were considered narrow-network plans. Meanwhile, plans that had large networks had increased to more than 82% of all Advantage plans. And roughly 17% of Advantage plans had medium-sized networks. The study is summarized here.

2

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People who switched from traditional Medicare to Medicare Advantage plans in 2016 spent $1,253 less during the year after they switched. That’s according to an analysis published in May 2019 by the Kaiser Family Foundation. Generally, people enrolled in Medicare Advantage plans are in better health than those in traditional Medicare. And because their health is better, they are less concerned about the network restrictions of Advantage plans. The analysis found, though, that even individuals with health problems saved money in Advantage plans. People with diabetes, for instance, averaged spending $1,072 less in the year after they switched, while those with asthma ($1,410) and those with breast or prostate cancer ($1,517) saved even more.

3

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Sixty-five percent of seniors have one or more pre-existing conditions that would make it difficult for them to get a Medigap policy once the initial six-month guaranteed issue is past. That’s the estimate of Drew Altman in a December, 2018 commentary published in Axios, a news and information website. Altman is president and CEO of the Kaiser Family Foundation. He points out that Medigap policies are unique in this respect, since Affordable Care Act policies and most other types of health insurance prohibit insurers from denying coverage to those with pre-existing conditions. There are four states – Connecticut, Maine, Massachusetts, and New York – that do have Medigap guaranteed issue protections for all Medicare beneficiaries 65 and older. But the other 46 do not. Altman’s column can be found here.

4

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Fidelity Investments’ most recent estimate is that a 65-year-old couple retiring in 2019 should have $285,000 in today’s dollars set aside for health care during their retirement. This estimate, which Fidelity released in April, is $5,000 higher than last year’s number. 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.

8

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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.

7

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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 in May of 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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Medicare Money Matters

A quarterly blog

 

  • Three questions to ask before enrolling in an Advantage plan

    Everything seems to be going right these days for the insurance companies that sponsor Medicare Advantage plans. Since 2016 they have seen their enrollment grow by 1.5 million people a year, to the point that almost 35% of Medicare beneficiaries now belong to an Advantage plan. By 2030, some 42% of the Medicare population will be enrolled in Advantage plans, according to projections by the Congressional Budget Office.

    That’s good news for retirees because as plan enrollment rises, insurance companies can offer richer sets of benefits. Even better, Medicare this year is boosting its payments to the plans by an average of 3.4%, the largest percentage increase in recent memory and one that should further strengthen coverage. To top it off, this year almost one-half of plan contracts will divvy up more than $6 billion in quality bonuses, which the plans are required to invest in added benefits.

    The thriving Advantage plan market is attracting interest from firms that have not previously sponsored plans. This year 14 additional insurers, including one that’s funded by a venture capital firm, are introducing Advantage plans. Nationally there are 417 more plans this year than last year, an 18% increase. Meanwhile, only five insurers left the market at the end of 2018 according to the Kaiser Family Foundation’s 2019 Advantage plan spotlight.

    Advantage plans are popular because they are inexpensive compared to Medigap policies. Approximately one-half of plan enrollees do not pay any premiums or have deductibles for medical or prescription drug coverage. In contrast, Medigap policies have steep premiums ranging between $1,200 to $4,000 a year depending on the plan, the policyholder’s age, and the state the policy is issued in.

    Another reason that people find Advantage plans attractive is for their extra benefits — routine vision and dental care and hearing aids, none of which are covered by Medigap policies. And some Advantage plans provide benefits that include a health club membership, a 24-hour nurse hotline, and free van rides to doctors’ offices and physical therapy centers.

    Retirees also like the fact that Advantage plans have out-of-pocket limits to protect them from catastrophic spending – last year the average OOP limit was just over $5,200. Most Medigap plans, on the other hand, do not have out-of-pocket limits, the exceptions being the rarely sold Plans K and L.

    But there’s a tradeoff – Advantage plans manage care in ways that may seem restrictive. Enrollees must use their plans’ network providers or else pay substantially more. In Advantage HMO plans, people often need to get referrals from their primary care doctors before they can see specialists. And they may need to get prior approvals for various treatments and procedures, some of which will be denied if the plan does not consider them medically necessary.

    ***

    To find out whether you should enroll in an Advantage plan, start by answering the three questions below. These aren’t the only ones you should ask, but they are the most important ones.

    1. Can you afford a Medigap policy throughout retirement? The high costs of a Medigap policy often force people to change to Medicare Advantage plans midway through retirement. More than one-half of new Advantage plan enrollees are people switching from Medigap policies, according to the Medicare Payment Advisory Commission. They switch because Medigap policies have become too pricy for their budgets.

    Financial planners usually assume that a 65-year-old client in relatively good health could live another 30 years or more. Using that assumption, they develop a spending plan to make sure the client does not run out of money in late retirement.

    You can use a similar approach to estimate what a Medigap policy will cost over the course of your retirement. And if the price tag seems too high, you may want to enroll in an Advantage plan

    Here are some rough estimates: if you get a Medigap policy at age 65 and live to age 90, you can expect to pay between $75,000 and $100,000 in Medigap premiums. That’s not counting Part B premiums and prescription drug costs. Or if you want to be more precise, start by estimating your first year’s premiums, which will vary depending on your age and the state you live in. Many state insurance departments publish lists of Medigap premiums, which you can access at the bottom of this page.

    Once you’ve estimated your annual premiums, assume they will increase at a 3.5% rate. That is about one percent less than the Medicare trustees’ projected per capita cost increases for the coming decade.

    You can use a shortcut to do the math: multiply your first year’s premiums by the number 40 to estimate how much you’ll pay over 25 years — and by the number 50 to estimate what you’ll pay over 30 years. If the resulting cost will put a crimp in your later retirement spending plans, you may want to consider an Advantage plan.

    Here’s an example: a 65-year-old St. Louis woman can get Plan G, which is a comprehensive Medigap policy, for about $2,000 a year. If she keeps this plan throughout her retirement, during the next 25 years, she will pay roughly $80,000 in Medigap premiums and about $105,000 over the next 30 years.

    Even though you may not be able to afford a Medigap policy over the long term, there could be reasons to purchase one when you first get Part B. Then you have a six-month, one-time Medigap open enrollment period when you do not have to answer health questions or disclose pre-existing conditions.

    Perhaps your doctor recently told you that you will need an expensive medical procedure within the next few years (think knee or hip replacements). When you sign up for Part B, if you get a comprehensive Medigap policy the expensive procedure will be almost fully covered with no prior approvals required.

    Nor do you have to worry about whether your surgeon, the attending physician, and the anesthesiologist are in network. After your operation, you can switch to an Advantage plan during the next Medicare annual open enrollment period (October 15 – December 7).

    2. Are your medical providers in the plan’s network? If not, you may wind up paying substantially more than you think you will. In an Advantage HMO plan, you will pay 100% of the cost to see an out-of-network doctor unless it’s an emergency. And you will also pay the full cost of any tests or treatments that the out-of-network doctor orders – even if the actual tests and treatments are given by network providers.

    In an Advantage PPO plan, you may have a hefty co-insurance payment when you see a provider who is not in the plan’s network. Out-of-network costs can add up quickly, particularly if you undergo an expensive treatment or diagnostic test.

    A 2017 Kaiser Family Foundation analysis found that nationwide only 46% of physicians belong to an Advantage plan network, although the percentage varies widely among counties. This analysis also found that more than one-third of Advantage plan enrollees were in plans whose networks included fewer than 30% of the county’s doctors. Depending on where you live, then, you may not be able to find a network that includes all your doctors.

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