Whether you are newly eligible for Medicare coverage or exploring options during the annual open enrollment (October 15-December 7), you will be confronted with many Medicare choices. Many of the choices you make will be to safeguard your retirement savings from high cost of health care. Your first Medicare choice will be between traditional (original) Medicare or a Medicare Advantage plan for hospital (Part A) and medical (Part B) insurance coverage. This is only the beginning and many more decisions must be made. There are several options available to reduce the total out-of-pocket costs for health care and Medicare-eligible beneficiaries should explore all that are available to them. These options include retiree health benefits, Medigap supplemental insurance, low income/low asset options, and other health benefits (e.g., veteran’s health benefits). Some Medicare-eligible beneficiaries are also able to combine more than one benefit for maximum reduction in out-of-pocket spending. These choices all protect the beneficiary from catastrophic cost-sharing liability to varying extents and are shown in the figure below.
Why Medicare Health Insurance is Not Enough Coverage
As we age and our bodies get closer to their expiration dates, it is not a question of if we will get sick, but more of a question of when and how expensively we will get sick. Medicare beneficiaries have median healthcare spending that is more than four times the spending for people under the age of 65. Using 2010 healthcare costs, researchers at the Center for Retirement Research at Boston College estimated that a typical married couple, both 65 years old and free of chronic disease, can expect to spend $197,000 on remaining lifetime health care (or $260,000 if you include nursing home care). People with costly chronic conditions will spend much more. How many Medicare-eligible beneficiaries have this amount of money allocated for health care?
Living on fixed or declining incomes and burdened with many non-covered health needs (e.g., long term custodial care, over-the-counter drugs and supplies, dental, hearing, and vision), the relatively high Medicare cost share is simply too financially risky for the majority of people. In 2014, the median income was $36,895 for households headed by Americans aged 65 and older compared to $60,462 for households under the age of 65. In addition, savings to cover spending shortfalls simply do not exist for the majority of Americans.
Medicare Choices–Supplemental Health Insurance
When we talk about Medicare supplemental health insurance, this refers to any health insurance that is the secondary payer to Medicare (the primary payer). Employer-sponsored retiree health benefits, Medigap, and Medicaid are all supplemental health insurance benefits. Veteran health benefits are not technically classified as health insurance coverage (supplemental or otherwise), but rather health services provided by a nation-wide, government-run healthcare system for eligible veterans.
Retiree Health Benefits
Many Medicare-eligible beneficiaries are fortunate to have some form of retiree health benefit provided by an employer or a union. Many retiree health benefits also include prescription drug coverage so the need to buy separate coverage (Medicare Part D) is unnecessary, this benefit took the form of a simple Medicare supplemental health insurance policy that paid for many (if not all) of the out-of-pocket expenses Medicare did not pay. This policy was usually paid for by the employer and may have come with extra health benefits not covered by Medicare.
High health costs have forced employers to modify this benefit for their employees and today companies use various strategies to limit their liability for retiree health care costs. Some employers limit retiree benefits to a local Medicare Advantage plan where the company has arranged for a group rate and lower cost sharing. In 2016, about 3.2 million of the 17.6 million Medicare Advantage enrollees fell under employer group coverage. In order to receive this retiree health benefit, the Medicare-eligible beneficiary cannot enroll in traditional (original) Medicare. Other companies offer retiree’s a fixed dollar amount to use for health care as they see fit (e.g., to purchase an individual Medigap supplemental plan). This latter approach is a shift from a defined benefit to a defined contribution health benefit and places the burden of high health inflation on the retiree’s shoulders rather than the employer’s.
For the vast majority of retirees, employer-sponsored health insurance ceases upon retirement and the less generous Medicare becomes their primary health insurance payer. Federal government retirees, on the other hand, can keep their generous government-sponsored FEHB coverage choosing from several nationwide and local HMO plans across the country. This means that federal retiree’s get many additional health insurance benefits that Medicare does not provide like chiropractic, acupuncture, vision, hearing, dental, and prescription drug coverage. When used as Medicare supplemental health insurance, the federal retiree ends up paying little to no cost share.
For Americans not covered by retiree (or union) health benefits or belonging to a select subset of Americans with special health benefits, Medicare choices are limited. In this situation, Medigap supplemental health insurance plans are the only Medicare choice available to manage the financial risk of healthcare costs. Medigap plans are available in 10 standardized benefits packages (labeled A, B, C, D, F, G, K, L, M, and N) and can be bought in all states except in Massachusetts, Minnesota, and Wisconsin. The different policies cover different combinations of Medicare out-of-pocket expenses.
Unlike Medicare Advantage plans, Medigap supplemental plans do not make any decisions about what to cover or not cover. If Medicare covers the health service, then the particular Medigap plan will pay its portion immediately after Medicare pays. The bill is usually forwarded electronically to the Medigap plan by Medicare. Medigap plans do not have networks of doctors or hospitals. Medigap plans do not provide any benefits above and beyond what Medicare covers and therefore prescription drug coverage must be obtained separately (i.e., as a stand-alone Part D plan or other programs like veteran’s health benefits).
What if I cannot Afford Supplemental Health Insurance…
What if my income and assets do not allow me to afford the Medicare Part B premium, let alone purchase supplemental health insurance? Luckily the government is there to help. Various federal and state administered programs exist for Medicare-eligible beneficiaries who cannot afford Medicare health insurance costs. Help with Part D prescription drug plan costs (premiums, deductibles, copays, and coinsurance) is handled by the federal government’s Extra Help program. In addition, various state-administered Medicaid programs provide financial assistance for Part A and Part B premiums, deductibles, copays, and coinsurance to the extent consistent with the individual Medicaid State Plans. The group of Medicare-eligible beneficiaries who enroll in any of the Medicaid programs are called Dual Eligibles and Medicaid is their secondary payer after Medicare. About 21% of Medicare beneficiaries are dual eligibles according to the Kaiser Family Foundation.
Generally speaking, the more help you get in paying your health insurance costs, the more stringent the income/asset requirements. Income requirements for eligibility range from less than 100% to 200% of the federal poverty level and total asset definitions vary by state or are a multiple of Supplemental Security Income (SSI) resource limits.
Medicaid (Title 19) for people who have spent down all their assets and do not have the income to pay for the monthly nursing home costs are a separate situation and will not be discussed in this blog post.
Other Health Benefits– Veterans Health Benefits
Other health benefits may be available to sub-groups of Americans in addition to those described above. The largest such healthcare benefits package in this category is provided by the Veterans Administration Health (VAH) system. These benefits are only available at government-run healthcare facilities across the country and cannot be used outside the VAH system. Enrolled veterans can receive care through any VA healthcare facility on a regular basis for both service-related and non-service related health needs. This care is known as the Standard Medical Benefits Package and provides the same healthcare services available in the private healthcare system. In addition, the Veterans Administration also has special healthcare benefits geared to elderly veterans for managing chronic disease, aging or injury.
Care in the Veterans Administration Health (VAH) system is not billed to Medicare and is not accepted as Medicare supplemental health insurance in the private healthcare system. Medicare-eligible veterans have many free or low cost share healthcare benefits that can reduce their out-of-pocket healthcare expenses greatly. Some of these benefits given below are not provided by Medicare or can be obtained more cheaply through the VAH system:
- Creditable Prescription drug coverage
- Long term care
- Many extras like money for home improvements that allow a disabled person to continue living in his/her home (disability doesn’t have to be service-related)
Like all VAH benefits, prescription drugs must be obtained from VAH facilities.
Combining Supplemental Benefits
Many Medicare beneficiaries can combine supplements for maximum health insurance coverage and minimum out-of-pocket cost share. The greater the number of Medicare choices open to the beneficiary, the more complicated the decision process. A non-veteran with no retiree health benefits and more than $1000 in assets to protect has only one option to manage the financial risk of needing expensive healthcare services—a Medigap policy + a Part D prescription drug plan (if affordable).
A person with retiree or veteran’s health benefits with credible prescription drug coverage has many more Medicare choices. This person need not purchase a separate Medicare Part D plan unless the beneficiary qualifies for free or reduced-price Part D coverage because of limited income or assets. Another option is to sign up for a Medicare Advantage Plan with drug insurance (MA-PD).
If a Medicare-eligible veteran lives near a VAH facility and receives (and plans to receive in the foreseeable future) all of his healthcare from it, then he can save on premiums/cost share by not enrolling in Medicare Part B and Part D. If he doesn’t live near a VAH facility or might need to use the services of the private healthcare system, he will have to purchase Part B coverage.
There are many more Medicare choices available for people (or spouses) who qualify under various programs.
The Bottom Line
The Medicare-eligible person is confronted with many Medicare choices for managing the financial risk associated with high health care costs. Decisions must be made based on personal needs and pocketbook constraints. Some Medicare choices will be more cost-effective than others. All decisions will contain a large element of uncertainty because no one can predict future healthcare needs. Federal employees and veterans have the greatest number of Medicare choices and the greatest probability for maximizing health benefits and minimizing cost share courtesy of the taxpayer. The use of supplemental health insurance plans reduce risk and safeguard retirement assets accumulated over a lifetime.