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Managing Medicare's Costs

Medicare applies the brakes to its once rapid cost growth

After five years of moderate cost increases, Medicare’s expenses might be starting to come under control. That is welcome news for seniors and the government, but not so much perhaps for doctors, hospitals, and pharmaceutical firms. The Congressional Budget Office said recently that over the last three years, its Medicare spending projections for the year 2020 have been revised downward by $126 billion, pointing to reduced spending growth, primarily for prescription drugs, as the reason.

Earlier this month, Fidelity Investments estimated that a 65-year-old couple without an employer supplemental plan will pay $220,000 for health care during retirement, which is $30,000 less than its estimate three years ago. And last fall the Employee Benefits Research Institute projected that a 65-year-old couple with median drug expenses who do not have an employer retiree plan will need $163,000 in savings to have a 50% chance of having enough to pay for their health care, adding that it was some “rare good news” in comparison to earlier estimates.

Still, slow growth in Medicare’s per capita spending does not necessarily equate to slow growth of the amounts that seniors spend for health care. The average Part D stand-alone premium is 7% higher now than it was a year ago, according to data from a Kaiser Family Foundation fact sheet. Medicare Advantage Prescription Drug plan premiums jumped 11% this year, according to another Kaiser report.

Not far behind, Medigap insurance companies have during the past year levied 4% to 6% premium increases. As an example, a recent Medigap premium summary for the state of Pennsylvania indicated that AARP’s premiums for Plans F and C – the two most widely sold Medigap plans – increased at rates between 4.8% and 5.2% for the plan year that began April 1.

Even in cases where people are able to keep the increases in their out-of-pocket costs more or less in line with Medicare’s inflation, they often lose ground to consumer inflation. During the last fiveyears, Medicare’s per-enrollee spending grew at a 3.12% average annual rate, much faster than the 1.75% annual rate at which Social Security payments increased. In addition, the consumer price index lagged the growth in Medicare’s per-enrollee spending by more than one percent annually during those five years.

Most experts believe the primary cause of Medicare’s slower spending growth was the recession, which has been followed by an anemic recovery. Medicare’s costs began to decelerate in mid-2008 as seniors reeled from heavy losses in the values of their homes and savings accounts. Many people quit going to doctors, postponed elective surgeries, and stopped getting refills of expensive medications. Consequently Medicare’s payments to doctors and insurance companies dropped sharply.

Health Reform may also have played a minor role in slowing Medicare spending, although the Affordable Care Act did not become law until 2010. But in the 18 months before the law was signed, health care organizations had already begun to streamline their operations in anticipation of the new rules and tighter payment guidelines. Another factor has been the influx of more than 14 million relatively young and healthy retirees who use few medical services and have low rates of hospitalization. They are partly responsible for the fact that Medicare’s costs per enrollee grew at a miniscule 0.4% last year because it added more than three million enrollees in 2012, Medicare’s total costs grew by 3%).

Knowledgeable people don’t agree about whether Medicare’s flattening cost curve is the start of a long-term trend or merely a momentary blip in healthcare inflation like the one that took place in the 1990s. Peter Orszag, former budget director in the Obama administration, was quoted in a New York Times article as saying that Medicare’s reduced spending is likely structural or long-term. In the same article, though, Douglas Holtz-Eakin, a former director of the CBO, said there are a lot of reasons to suspect that the slowdown is temporary.

If seniors believe the recent trends will persist, they could underestimate their future retirement costs and be financially squeezed in later retirement. The same is true if they underestimate future rates of inflation, how long they will live or how well their investments will perform. On the other hand, if they save too much for later retirement, admittedly a rare event, they may crimp their present lifestyles.

Financial advisors believe the best ways to manage retirement risk are to diversify investments, design retirement spending plans tailored to individual clients, and re-visit plans annually to see if the initial assumptions still hold, if current spending rates can be sustained, and if portfolios need to be re-balanced.

Those same basic principles apply to healthcare planning. Seniors for instance can diversify the types of coverage they have at various times during retirement. More than 90% of people in their 60s and early 70s are in good, very good or excellent health. They may not need the most comprehensive (and expensive) insurance during those years. Later they might.

If they have employer coverage with several options to choose among, they can initially select a managed care plan and then in later years switch to a fee-for-service supplement during open enrollment. Or they can choose Advantage plans over Medigap policies, or if they don’t find an Advantage plan that meets their needs, they can purchase a less comprehensive Medigap policy like Plan L, avoiding the popular Plan F and saving several hundred dollars a year.

They can also update their healthcare plans once a year, typically a 30-minute effort. If they do this during Medicare’s annual open enrollment (or during their employer plan’s open enrollment), they can change coverage if need be. Over the years they will likely save substantial sums by monitoring their coverage. And even when they don’t save money, they can be reassured by the annual reviews that they are managing their costs wisely. Over time, they will learn what they are paying for health care and how fast their costs are growing. They may even get a better idea of their remaining life expectancies. A 70-year-old in excellent health may need to readjust her thinking, for example, since five years of uncertainty have been removed from the estimates she made at age 65. ◊◊

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