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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 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 $125,000 a person. Fidelity Investments, for example, estimates that a 65-year-old couple who retire in 2017 and who do not have an employer supplement will pay $275,000 for health care during their retirement. 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 $2,500 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.

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 quarterly blog

 

  • 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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