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Managing Medicare's Costs

Medicare coverage and the aging curve

Imagine a world without healthcare inflation. Year after year, medical costs remain the same Prescription drug manufacturers do not raise drug prices, so that Lipitor costs no more today than it did ten years ago.

Even in this imaginary world, people’s healthcare costs will increase over time. The prices for medical services and drugs will not change if there is no inflation, but people will pay more as they age because they are using more medical services and taking more prescription drugs.

Health actuaries call this trend the aging curve. It starts once infancy has passed. People in their 20s use more medical services than teenagers, and people in their 30s use more than people in their 20s. Mainly as a result of the aging curve, older individuals often cannot afford to pay for individual policies.

The new Health Reform law tries to address this concern, at least for middle-aged people who are not yet 65. The law places a cap on insurers’ ability to age-rate premiums for any policies that will be sold through the health insurance exchanges that are scheduled to start in 2014. By doing this, the law will result in younger people paying more than they otherwise would.

Once they reach age 65 and enroll in Medicare, individuals are better protected since neither Part B nor Part D premiums are adjusted for age. Whether their supplemental premiums are tied to their ages depends on the types of plans they have. In all but a few states, for instance, Medigap policies are sold on attained-age basis. This makes these policies particularly expensive for retirees in their late 70s and early 80s, who frequently pay $3500 or more each year in Medigap premiums.

Earlier this year the AARP Policy Institute published a study summarizing the findings of University of Maryland researchers who had analyzed the healthcare spending patterns of the 12,000 people in the Medicare Current Beneficiary Survey. The researchers found that in 2006 (the most recent year for which data were available), the average out-of-pocket healthcare spending, including premiums, for people ages 65-69 was $3,575 a year. Meanwhile, people ages 80-84 spent $5,603 a year. So, those in the older group spent 57% more, on average, or approximately 3.8% for each year that they were older. The numbers do not include people who had Medicare Advantage plans.

Medigap premiums are usually adjusted by roughly 3% for each year of age. A 65-year-old living in St. Louis, for instance, will pay almost $1,900 a year for a Medigap Plan F sold by Mutual of Omaha, while an 80-year-old will pay $2,640 annually, a difference of 2.6 % for each year of age. And in Baltimore, a 65-year-old who buys a Plan F sold by Aetna will pay $2,210 annually in premiums, while an 80-year-old will pay $3,610, a difference of 4.2% for each year of age.

In addition to adjusting premiums for age, insurers who sell Medigap policies add another 3% or so for healthcare inflation.For planning purposes, then, Medigap premiums increase by about 6% annually. United Healthcare, which sells the most Medigap policies, says that over the past several years, its premiums have grown by almost 6% annually.

Partly because it is age-adjusted and partly because it is the only type of supplemental coverage that receives no government or employer subsidies, a Medigap policy is the most expensive type of supplemental coverage for older people. Those in early retirement should understand how much this coverage will likely cost if they live to ripe old ages, so that they are not forced to abandon it later.

Medicare Advantage plans, on the other hand, are the least expensive choices for people who don’t have employer supplements. Unlike Medigap policies, Advantage plans do not adjust premiums for age. Thus an 85-year-old retiree will have the same premiums, deductibles, and co-pays as a 65-year-old. Although older retirees in Advantage plans may not realize it, the government subsidizes them, since the monthly rates it pays to the plans are age-adjusted.

Employer retiree plans are group coverage, and so they have uniform premiums that are not adjusted for someone’s age. This means that employer plan premiums are often higher than they would otherwise be for younger retirees and lower for older ones. Besides benefiting from the employer subsidy, younger retirees in these plans have the knowledge that one day when they are in the 80s, they will have the best of both worlds. They will then have a subsidy from the employer as well as one from younger retirees who are paying their age adjustments.

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