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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.


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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.


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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.


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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.


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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 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


  • 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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