Medical spending in retirement

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Medical spending in retirement describes the impact medical spending could have on your retirement and how to incorporate it into your retirement planning.

Overview

No other area better illustrates how spending habits change as we grow older. In a 2009 — 2010 BLS survey, households with members age 62 and older reported spending 11.3% of annual income after taxes on healthcare, including insurance. The average for all households, including the elderly, was 6.9%. Medical costs outpaced overall inflation from 1983 — 2012 except for 1996 according to the BLS, and medical costs grew 5.1% annually in that time frame. [1]

From 2006 — 2011 both the experimental CPI-Elderly (62 years and older) and the CPI for All Urban Consumers (CPI-U) rose at the same annual rate of 2.3%. This turnaround was caused by changes in medical care and shelter: the gap between medical care inflation and overall inflation has generally fallen since 2005, and shelter inflation has been rising more slowly. [2]

In 2017 it was reported that “Average spending among people who are 64 years old is about 4.8 times as high as average spending among people who are 21 years old,” according to the Congressional Budget Office last year, citing research by actuaries. [3]

Health Conditions

Unlike employer insurance plans, Medicare plans cover only individuals, not couples or families. Chronic health conditions will increase doctor, hospital, and drug costs, and may make one combination of Medicare supplemental plans better than another.

The percentage among Medicare beneficiaries in 2010 of the 15 most common chronic conditions were:

2010 Medicare Chronic Conditions [4]
1. High blood pressure (58%) 6. Heart failure (16%) 11. Atrial fibrillation (8%)
2. High cholesterol (45%) 7. Chronic kidney disease (15%) 12. Cancer (8%)
3. Heart disease (31%) 8. Depression (14%) 13. Osteoporosis (7%)
4. Arthritis (29%) 9. COPD (12%) 14. Asthma (5%)
5. Diabetes (28%) 10. Alzheimer's disease (11%) 15. Stroke (4%)

Over two-thirds of beneficiaries had two or more chronic conditions, and 14% had 6 or more. Beneficiaries with 4 or more chronic conditions had higher than average Medicare spending. Beneficiaries with 6 or more chronic conditions had over 3 times the average Medicare spending; these beneficiaries were more likely to have heart failure, chronic kidney disease, COPD, atrial fibrillation, and stroke. [5]

Those 80 and older are more likely to have multiple chronic conditions and functional limitations, and this combination (compared to chronic conditions only) is associated with

  • increased emergency department visits and inpatient hospitalizations, and
  • higher Medicare spending for inpatient hospital, skilled nursing facility, and home health services. [6]

Health Insurance

If you paid off your mortgage before retirement, you probably changed from itemized to standard deduction on your tax returns. After retirement, paying for health insurance alone will move you back to itemized deductions.

Medicare

See also: Medicare

Medicare Part A (Hospital) is paid by previous payroll deductions, and Medicare Part B (Doctor) premiums are standardized, but these plans only cover 80% of hospital and doctor costs.

Medicare Part A and B is sometimes called original, traditional or fee-for-service Medicare to differentiate from Medicare Advantage health maintenance organization (HMO) or preferred provider organization (PPO) plans. Original Medicare is usually bundled with private supplemental (Medigap) and drug insurance plans (below) to provide similar benefits.

2016 Medicare Part A and Part B out-of-pocket costs [7]
Part A premium Most people don't pay a monthly premium for Part A (sometimes called "premium-free Part A"). If you buy Part A, you'll pay up to $411 each month. Calculate my premium.
Part A hospital inpatient deductible and coinsurance

 You pay: 

  • $1,288 deductible for each benefit period
  • Days 1-60: $0 coinsurance for each benefit period
  • Days 61-90: $322 coinsurance per day of each benefit period
  • Days 91 and beyond: $644 coinsurance per each "lifetime reserve day" after day 90 for each benefit period (up to 60 days over your lifetime)
  • Beyond lifetime reserve days: all costs
Part B premium People on Social Security pay $104.90 each month. For those who have not started Social Security, the premium increased to $121.80 per month in December 2015.
Part B deductible and coinsurance $166 per year. After your deductible is met, you typically pay 20% of the Medicare-approved amount for most doctor services (including most doctor services while you're a hospital inpatient), outpatient therapy, and durable medical equipment.

Medicare-approved amount is the amount a doctor or supplier that accepts Medicare assignment can be paid. It may be less than the actual amount a doctor or supplier charges. Medicare pays part of this amount and you're responsible for the difference.

Durable medical equipment is certain medical equipment, like a walker, wheelchair, or hospital bed, ordered by your doctor for use in the home.

Medicare Part A and Part B does not cover the following (although they may be included in Medigap or Part C Advantage plan private insurance):

  • Long-term care (also called custodial care)
  • Most dental care
  • Eye examinations related to prescribing glasses
  • Dentures
  • Cosmetic surgery
  • Acupuncture
  • Hearing aids and exams for fitting them
  • Routine foot care [8]

Medigap

Standardized Medigap plans are offered in all states but

The standard plan features are shown in the table "How to compare Medigap policies" below:

Medigap Benefits Standard Medigap Plans [9]
A B C D F* G K L M N
Part A coinsurance and hospital costs up
to an additional 365 days after Medicare benefits are used up
Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Part B coinsurance or copayment Yes Yes Yes Yes Yes Yes 50% 75% Yes Yes***
Blood (first 3 pints) Yes Yes Yes Yes Yes Yes 50% 75% Yes Yes
Part A hospice care coinsurance or copayment Yes Yes Yes Yes Yes Yes 50% 75% Yes Yes
Skilled nursing facility care coinsurance No No Yes Yes Yes Yes 50% 75% Yes Yes
Part A deductible No Yes Yes Yes Yes Yes 50% 75% 50% Yes
Part B deductible No No Yes No Yes No No No No No
Part B excess charge Note 1 No No No No Yes Yes No No No No
Foreign travel exchange (up to plan limits) No No 80% 80% 80% 80% No No 80% 80%
Out-of-pocket limit** N/A N/A N/A N/A N/A N/A $4,960 $2,480 N/A N/A

Yes = the plan covers 100% of this benefit
No = the policy doesn't cover that benefit
% = the plan covers that percentage of this benefit
N/A = not applicable
[*] Plan F also offers a high-deductible plan. If you choose this option, this means you must pay for Medicare-covered costs up to the deductible amount of $2,180 in 2016 before your Medigap plan pays anything.
[**] After you meet your out-of-pocket yearly limit and your yearly Part B deductible, the Medigap plan pays 100% of covered services for the rest of the calendar year.
[***] Plan N pays 100% of the Part B coinsurance, except for a copayment of up to $20 for some office visits and up to a $50 copayment for emergency room visits that don't result in inpatient admission.
Note 1: If you have Original Medicare, and the amount a doctor or other health care provider is legally permitted to charge is higher than the Medicare-approved amount, the difference is called the excess charge.


In 2010 the most popular Medigap plan was Plan F (60% of total spending), followed by Plan C (21%) and Plans B and D (5% each). Plan F was in the middle of the original Plan A to J range of benefits and expense. Plan F was also the least expensive to offer 100% coverage on Part B excess charges and the Part B deductible. [10]

Medicare has a Medigap Policy Search.

Drug

Medicare Part D Prescription drug plan out-of-pocket costs [11]
Part D premium The Part D monthly premium varies by plan (higher-income consumers may pay more). Compare costs for specific Part D plans.

The premium is the periodic payment to Medicare, an insurance company, or a health care plan for health or prescription drug coverage.

Medicare health plans

A Medicare health plan is offered by a private company that contracts with Medicare to provide Part A and B benefits to people with Medicare who enroll in the plan. The two most common are Medicare Advantage plans and Medicare Medical Savings Account (MSA) plans. [12]

Medicare Advantage

Part C Medicare Advantage out-of-pocket costs [13]
Part C premium The Part C monthly premium varies by plan. Compare costs for specific Part C plans.

The premium is the periodic payment to Medicare, an insurance company, or a health care plan for health or prescription drug coverage.

Medicare Medical Savings Account

Medicare Medical Savings Account (MSA) plans combine

  1. A high-deductible health plan: The first part is a special type of high-deductible Medicare Advantage Plan (Part C). The plan will only begin to cover your costs once you meet a high yearly deductible, which varies by plan.
  2. A Medical Savings Account (MSA): The second part is a special type of savings account. The Medicare MSA Plan deposits money into your account. You can choose to use money from this savings account to pay your healthcare costs before you meet the deductible.

In addition to the Medicare services that all Medicare Advantage Plans must cover, some plans may cover extra benefits for an extra cost, like dental, vision, or long-term care not covered by Medicare. Medicare MSA Plans do not cover Medicare Part D prescription drugs; this would require a separate Prescription drug plan (Part D). [14]

This is similar to the High deductible health plan and Health savings account in the Bogleheads® Wiki.

Comparison of common Medicare plan bundles

The table below summarizes the features of two common Medicare plan bundles:

  1. Medicare Parts A (Hospital) and B (Doctor) with Medigap supplement and Part D Prescription drug plan, and
  2. Medicare Advantage Part C with drug coverage.


Comparison of Medigap and Medicare Advantage
Feature Medicare with Medigap and Drug Plans Medicare Advantage with Drugs
Enrollment 40 quarters of employment with Social Security deductions automatically qualifies you for Medicare Part A (Hospital) with no monthly premium. Medicare Part B (Doctor) requires the payment of a monthly premium. [15] You must be enrolled in Medicare Parts A and B first, then enroll in a Medicare Advantage plan. [16]

In 2016, 31% of Medicare beneficiaries were enrolled in Medicare Advantage plans. [17]

Access to Services You can go to any doctor or hospital in the United States that accepts Medicare; there is no network. There are no referrals for specialists and no prior authorization for services. [18] Network providers, referrals for specialists, and prior authorization for certain services. Out-of-network care at a higher cost. Emergency and urgent care outside the service area, but not follow up or routine care. Plan changes at the open enrollment period only. [19]
Costs Monthly premium for Part B (Doctor), and deductibles, coinsurance and copays. Out-of-pocket maximum or cap with the separate Medigap plan. Purchase Part D drug coverage separately. [20] Monthly premium for Part B. Out-of-pocket costs vary and may include: additional monthly premium, yearly deductible, copay for visit or service, out-of-network provider charge, and cost-sharing. Cost-sharing is limited to traditional Medicare charges for chemotherapy, dialysis, and skilled nursing care. Maximum out-of-pocket limit on cost-sharing. Plans may change benefits, premiums, and copays yearly. [21]
Benefits "Medically necessary health care services" as determined by Medicare. These are not covered by Medicare, but may be offered by a Medigap plan: long-term care, most dental care, eye examinations for prescribing glasses, dentures, cosmetic surgery, acupuncture, hearing aids and exams, and routine foot care [22] Plan benefits must be at least equal to traditional Medicare. Some plans may cover services which are not covered by traditional Medicare, such as dental, hearing and vision care. [23]
Ratings 6% of those with traditional Medicare and Medigap plans rated their insurance as fair or poor. [24] 15% of those with Medicare Advantage policies rated their insurance as fair or poor. Although enrollees spent less on premiums and out-of-pocket costs, they were more likely to report cost-related access problems. [25]
Financing Part A: 2.9% tax on earnings paid by employers and employees (1.45% each), for 88% of Part A revenue). Higher-income taxpayers (>$200,000/individual and $250,000/couple) pay 2.35%.

Part B: general revenues (73%), beneficiary premiums (25%), and interest and other sources (2%). Beneficiaries with incomes >$85,000/individual or $170,000/couple pay a higher premium of 35% to 80%.

Part D: general revenues (77%), beneficiary premiums (14%), and state payments for dually eligible beneficiaries (10%). Higher-income enrollees pay a larger premium. [26]

Medicare Advantage (Part C) is not separately financed. Medicare Advantage HMOs and PPOs cover all Part A, Part B, and (typically) Part D benefits. Beneficiaries pay the Part B premium and a premium for additional benefits. [27]

2003 payment formulas purposely overcompensated Part C plans by 12% or more compared to original Medicare financing, to increase availability in rural and inner-city locations. [28]

These subsidies to Medicare Advantage providers started phasing out with the Affordable Care Act. [29]

Federal funding cuts since 2014 have led to some increases in Medicare Advantage premiums and copays of 50 to 55%.[30]

Dental

A common complaint on the Bogleheads® Forum is that dental and long-term care insurance insurance cover small expenses that many could self-insure, but not high expenses causing financial hardship. [31] The consensus is that dental insurance is not worthwhile unless it is an employee benefit. Many dentists participate in dental discount plans, such as Coast2Coast Rx Card.

Long-term care insurance

You may need long-term care if you are unable to care for yourself due to physical illness, disability, or cognitive impairment, such as Alzheimer’s disease. You can receive long-term care at home or in a hospice, adult day care center, nursing home, or assisted living facility.

Long-term care insurance can help protect your assets against the high cost of extended long-term care. However, a common complaint on the Bogleheads® Forum is that dental and long-term care insurance insurance cover small expenses that many could self-insure, but not high expenses causing financial hardship. [32] If you don’t have long-term care insurance, you may have to pay down your assets until you qualify for Medicaid. Medicaid paid for 49% of Americans' long-term care in 2002 [33], and 40% in 2016. [34]

In 1999, the average length of stay for nursing home residents was 2.4 years for all residents, and 8.9 months for discharged residents. [35]

To determine whether long-term care insurance is right for you, consider your personal risk factors:

  • life expectancy,
  • gender,
  • family health history,
  • assets, and
  • available alternatives.

The National Association of Insurance Commissioners (NAIC) "Shopper’s Guide to Long-Term Care Insurance" [36] contains a set of worksheets that can help you decide if long-term care insurance is needed. It also includes the comment that you should not purchase a policy if you can't afford the premiums.[37]

Sample Costs

The following out-of-pocket costs were posted by Sheepdog in 2016:

Sample out-of-pocket costs for a retired couple, ages 82 and 75 [38]
Item 2010 2011 2012 2013 2014 2015
Medical insurance [Note 1] $6,830 $7,033 $8,037 $8,943 $6,436 $6,436
Dentists [Note 2] $220 $2,962 $2,977 $1,576 $2,500 $2,981
Physicians $1,583 $162 $66 $111 $296 $464
Prescription Drugs [Note 3] $685 $808 $62 $140 $279 $426
Miscellaneous [Note 4] $532 $2,545 $248 $2,577 $0 $1,107
Hospital/Surgical $0 $906 $0 $0 $0 $424
Total out-of-pocket $9,850 $14,416 $11,290 $13,347 $9,511 $11,838

Reviewing and changing Medicare plans



Changes between original Medicare (Part A and B) with a Medigap supplement, and Medicare Advantage (Part C), can also be made but require careful study in advance. For example, insurance companies can base Medigap approval and premium on pre-existing medical conditions after the initial enrollment period at 65. You can get local, personalized Medicare counseling from your State Health Insurance Assistance Program (SHIP).

Life Expectancy Calculators

Social Security Administration

If you are considering when to collect Social Security retirement benefits, one factor is how long you might live. The Social Security Administration's Life Expectancy Calculator utilizes data compiled by the Social Security Administration. For example:

  • A man reaching age 65 in 2016 can expect to live, on average, until age 84.2.
  • A woman turning age 65 in 2016 can expect to live, on average, until age 86.6.

About one out of every four 65-year-olds in 2016 will live past age 90, and one out of 10 will live past age 95. [39]

After you use the Life Expectancy Calculator, you can go to:

Dr. Thomas Perls - Living to 100

The Living to 100 Life Expectancy Calculator, Thomas Perls MD, MPH, retrieved August 5, 2016.

Abaris - How Long Will I Live?

How Long Will I Live?, Abaris Financial, Inc., retrieved August 5, 2016. Abaris is a registered fixed annuity producer in Philadelphia, PA and licensed in all 50 states and the District of Columbia.

Northwestern Mutual Lifespan Calculator

Lifespan Calculator, Northwestern Mutual, retrieved August 5, 2016.

See also

Notes

  1. Medicare, Medigap, Part D for both spouses in 2010 - 2013. Medicare Advantage plan for one spouse only in 2014 - 2015.
  2. Uninsured.
  3. Mostly generic.
  4. Eye, lab, hearing, and chiropractor, mostly uninsured. Includes hearing aid (uninsured) for one spouse in 2011 and 2013 at a cost of over $2000 each.

References

  1. Adam Zoll, "Don't Discount Inflation When Planning for Retirement", September 10, 2012.
  2. "Consumer Price Index for the elderly", Bureau of Labor Statistics, March 2, 2012.
  3. "Repeal of Health Law Hits a New Snag: Older Adults", The New York Times, March 6, 2017.
  4. "Chronic Conditions among Medicare Beneficiaries, Chartbook", Centers for Medicare and Medicaid Services, 2012.
  5. "Chronic Conditions among Medicare Beneficiaries, Chartbook", Centers for Medicare and Medicaid Services, 2012.
  6. Tricia Neuman, Juliette Cubanski, Jennifer Huang, and Anthony Damico, "The Rising Cost of Living Longer: Analysis of Medicare Spending by Age for Beneficiaries in Traditional Medicare", Kaiser Family Foundation, January 14, 2015.
  7. "Medicare 2016 costs at a glance", Centers for Medicare & Medicaid Services, retrieved August 6, 2016.
  8. "What's not covered by Part A & Part B?", Centers for Medicare & Medicaid Services, retrieved August 6, 2016.
  9. "How to compare Medigap policies", Centers for Medicare & Medicaid Services, retrieved August 6, 2016.
  10. Popular Medigap Plans, Weiss Ratings Medigap, retrieved August 6, 2016.
  11. "Medicare 2016 costs at a glance", Centers for Medicare & Medicaid Services, retrieved August 6, 2016.
  12. "About Medicare health plans", Centers for Medicare & Medicaid Services, retrieved August 6, 2016.
  13. "Medicare 2016 costs at a glance", Centers for Medicare & Medicaid Services, retrieved August 6, 2016.
  14. "Medicare Medical Savings Account (MSA) Plans", Centers for Medicare and Medicaid Services, retrieved August 6, 2016.
  15. "Choosing Between Traditional Medicare and a Medicare Advantage Plan", Center for Medicare Advocacy, retrieved August 7, 2016.
  16. "Choosing Between Traditional Medicare and a Medicare Advantage Plan", Center for Medicare Advocacy, retrieved August 7, 2016.
  17. Juliette Cubanski and Tricia Neuman, "The Facts on Medicare Spending and Financing", July 20, 2016.
  18. "Choosing Between Traditional Medicare and a Medicare Advantage Plan", Center for Medicare Advocacy, retrieved August 7, 2016.
  19. "Choosing Between Traditional Medicare and a Medicare Advantage Plan", Center for Medicare Advocacy, retrieved August 7, 2016.
  20. "Choosing Between Traditional Medicare and a Medicare Advantage Plan", Center for Medicare Advocacy, retrieved August 7, 2016.
  21. "Choosing Between Traditional Medicare and a Medicare Advantage Plan", Center for Medicare Advocacy, retrieved August 7, 2016.
  22. "What's not covered by Part A & Part B?", Centers for Medicare & Medicaid Services, retrieved August 6, 2016.
  23. "Choosing Between Traditional Medicare and a Medicare Advantage Plan", Center for Medicare Advocacy, retrieved August 7, 2016.
  24. Jennie L. Phipps, Medigap Vs. Advantage plans, Bankrate.com, July 22, 2012.
  25. Jennie L. Phipps, Medigap Vs. Advantage plans, Bankrate.com, July 22, 2012.
  26. Juliette Cubanski and Tricia Neuman, "The Facts on Medicare Spending and Financing", July 20, 2016.
  27. Juliette Cubanski and Tricia Neuman, "The Facts on Medicare Spending and Financing", July 20, 2016.
  28. "Part C: Medicare Advantage plans", Wikipedia, retrieved August 7, 2016.
  29. Jennie L. Phipps, Medigap Vs. Advantage plans, Bankrate.com, July 22, 2012.
  30. Phil Galewitz, "Impact Of Medicare Advantage Cuts On Seniors Sharply Disputed", Kaiser Health News, February 23, 2014.
  31. Bogleheads® forum topic: Re: Dental insurance, dental plans or pay as you go?, June 9, 2016
  32. Bogleheads® forum topic: Re: Dental insurance, dental plans or pay as you go?, June 9, 2016
  33. Christine Benz, 40 Must-Know Statistics About Long-Term Care, Morningstar, August 9, 2012.
  34. Medicaid Safety Net Stretched To Pay For Seniors' Long-Term Care, National Public Radio, August 3, 2016.
  35. Christine Benz, 40 Must-Know Statistics About Long-Term Care, Morningstar, August 9, 2012.
  36. "A Shopper’s Guide to Long-Term Care Insurance", National Association of Insurance Commissioners, 2013.
  37. "A Shopper’s Guide to Long-Term Care Insurance", National Association of Insurance Commissioners, 2013, page 8.
  38. Sheepdog, Bogleheads® forum topic: Re: Switching to Medicare -- cost vs health insurance, August 5, 2016.
  39. Calculators: Life Expectancy, Social Security Administration, retrieved August 7, 2016.

External links