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Managing Medicare's Costs

Using Medicare's per-capita costs to find the best type of coverage

The costs of just about everything depend on where you live. You’ll pay 25% more for a gallon of gasoline in Nevada than you will in neighboring Arizona. If you own a 1,600-square foot house in California, by Zillow’s account it’s worth about $472,000, but in Texas its value is one-third of that.

The same is true of retirement health care costs, which can vary greatly from one area to the next. Knowing these costs and how they compare to costs in other areas can sometimes point you toward the most cost-effective type of coverage. If you’re eligible for Medicare, you want to know how your area compares in its costs for retirement health care. The reason is that in some cases an area can have high health care costs for people under 65 but low costs for those 65 and older, as one large study found.

It’s also important to look at health care costs at the county level. Most states are too large and their populations are too diverse for statewide data to be of much help in choosing the most cost-effective type of coverage. In the state of New York, for instance, there are five counties with Medicare per-capita spending rates that rank them in the country’s 20 highest, but there are also two counties with per-capita spending rates among the country’s 20 lowest.

To find your area’s costs, go to the Medicare’s statistics dashboard. Then select your state and county to see how much Medicare spent per capita in 2014, the most recent year for which costs are available. You can also see how much these payments differ from your state’s and the national average.

If Medicare pays substantially more per capita in your county than it does in other counties, you will get the most bang for your buck in a Medicare Advantage plan. And if you choose to buy a Medigap policy you will be looking at above average premiums. But the reverse is true if Medicare pays substantially less in your county – Medigap policies will be attractively priced and Advantage plans will have skimpy benefits.

Consider Florida’s Miami-Dade County. In 2014 Medicare paid doctors and other medical providers there an average of $14,470 for each beneficiary, which earned Miami-Dade the dubious distinction of having the highest Medicare per capita costs in the country. Medicare adjusts its per-capita costs to even out any regional price differences, so when it pays more in a county it’s because patients there are using more medical services. That means that the county’s Medigap policyholders are also using more medical services, driving their premiums up. As an example, in Miami-Dade County a 65-year-old pays $3,300 a year for Medigap Plan F, one of the highest guaranteed-issue premiums in the country.

There’s a tradeoff, however. In high cost areas like Miami-Dade, Medicare also pays substantially more to Medicare Advantage plans. And because the plans are required to use Medicare’s payments to enhance coverage, they have much stronger benefit packages than do plans in low-cost areas.

That helps to explain why Miami-Dade County’s Advantage plan lineup is exceptional. Of the county’s 29 Advantage plans that include prescription drug coverage, 18 of them – or 62% — have Medicare quality ratings of four stars or higher (16 of of the plans are HMO’s). Nationally, only 41% of Advantage plan contracts have ratings four stars or higher.

Moreover, all 18 of Miami-Dade’s four-star or higher Advantage plans have zero premiums for health and for prescription drug coverage, with 14 of them also having zero deductibles for medical and Rx drug coverage. And most of the county’s Advantage plans offer no-cost routine dental and vision care and complimentary health club memberships.

Perhaps just as important, only two of the Miami-Dade’s 16 highly rated Advantage HMO plans have out-of-pocket limits higher than Medicare’s recommended $3,400. If you enroll in one of these Advantage HMO plans and use only network providers, you will probably save $2,500 or more a year compared to the amount you’d pay for Medigap Plan F. And it’s virtually impossible to spend more in one of these four-star or higher Advantage HMO plans than you will for a Medigap policy and a stand-alone prescription drug plan.

Because of these benefits, which are lavish compared to the benefits of plans in most other counties, almost two-thirds of the Medicare beneficiaries in Miami-Dade County are enrolled in Advantage plans, according to an analysis by the Kaiser Family Foundation. That’s more than twice the national Advantage plan enrollment rate.

Meanwhile across the state in Sarasota County, Medicare paid only $9,326 per capita for care in 2014. That was well below the average Florida county and 36% lower than Medicare’s payments in Miami-Dade. Consequently, Medigap Plan F premiums for a 65-year-old cost $1,000 a year less in Sarasota County than in Miami-Dade. And the reason for the large difference is policyholders in Miami-Dade see their medical providers more frequently and use additional medical services.

The Advantage plan lineup in Sarasota County appears to be somewhat better than one would expect based on Medicare’s low per-capita payments. Still, fewer than one-half of the county’s Advantage plans have Medicare quality ratings of four stars or higher. Also, their average out-of-pocket limits are higher and their benefits are somewhat weaker than they are in Advantage plans in Miami-Dade County.

Why do retirees in counties like Miami-Dade use more medical services than those in other counties? One reason, of course, is that the Medicare population could be in poorer health and require more care. Another is that a county may have a large supply of doctors in proportion to the number of patients, creating an incentive for some doctors to remain busy by ordering discretionary tests and treatments.

Besides Medicare’s per-capita payments, there are two other geographic factors that may determine your choice of coverage. If you live in a rural area, you will probably have few Advantage plans to choose among. That’s mainly because away from urban areas insurance companies have difficulty finding enough doctors to form networks.Thus the only Advantage plans that are available are likely to be small-network HMO’s and Regional PPO’s with high out-of-pocket limits.

That leaves Medigap policies as the only alternatives in these less populated areas. That’s why almost one-half of retirees in rural states like North Dakota, South Dakota, Iowa, Nebraska, and Kansas have Medigap coverage. That’s compared to fewer than 20% of retirees nationwide who have Medigap policies.

Finally, three states have laws regarding Medigap sales that could influence the type of coverage you choose. In Connecticut, Massachusetts, and New York, you can buy a Medigap policy even in late retirement without having to answer health questions. Premiums in those states are high because insurance companies cannot decline coverage or charge more to people who have serious pre-existing conditions.

In these three states, then, if you are in fairly good health and can find a marginally acceptable Advantage plan, you will probably save money by enrolling in it. Then in later years as you use more medical services and perhaps see more specialists, you have the option or purchasing a Medigap policy without paying more because of any pre-existing conditions you may have. ◊◊

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