This article was first posted October 1, 2020.
After 26+ years of early retirement, I'm about 4 months away from Medicare eligibility. A few readers have asked what I'm doing for Medicare insurance post age-65 and how I'm going to manage it, so here goes.
At age 64 I'm still pretty healthy and my ongoing medical expenses average $1,000 to $1,500 per year (including health insurance premiums.) I've managed to keep it that low by using a high-deductible Bronze Obamacare plan as catastrophic health coverage and then paying cash out-of-pocket for items like doctor visits, labs, x-rays or prescription drugs when the insurance company price is a lot higher. I've found insurance company price gouging in generic prescription drugs to be particularly obscene. I can get a year's supply of the 3 generic drugs I currently take at Costco for less than $300/year if I buy them in one fill. Getting the same three drugs in four 90-day fills and billing it to my insurance would cost $800 to $1,000 per year out-of-pocket since I have a $5,000 annual deductible. There appears to be immense savings in keeping a for-profit health insurance CEO out of your business.
What are your choices?
If your former employer offers retiree health coverage, that's likely the best choice. Failing that, you have the choice between traditional Medicare, Medicare Advantage Part C (with or without drug coverage), or traditional Medicare and a private Medigap supplement plan plus Part D drug coverage. Health insurance agents have been very successful in scaring seniors with the "20% that Medicare doesn't cover." But as this medical doctor points out, the actual copays you'll owe under Medicare amount to about 3.5% of the Medicare reimbursement. Sure it's a 20% co-pay on doctor's bills, but the copay on a $1 million hospital bill is capped at just $1,408 for a 60-day stay-- that's not even 1%.
Medicare Advantage (Part C) -- it's all about the "skim", baby
Like most people age 64, my residential mail box is overflowing with junk mail from Medicare Advantage sales agents. I suspect a lot of the phone calls I get are also from agents selling Medicare Advantage, but I only pick up the phone for folks on my contact list.
Why are people so hot to sell me a Medicare Advantage plan? Who's being "advantaged" if I buy one? Let's look at the numbers.
The actuarial value of your Medicare benefit is somewhere around $12,000/year. It varies a bit from state-to-state and county-to-county. Surprisingly, the lowest Medicare spending is in Hawaii with a value of $883/month or $10,596/year. Unsurprisingly Alaska has the highest average costs of a bit over $14,000/year.
If you choose Medicare Advantage, the Centers for Medicare & Medicaid Services (CMS), transfers that average $12,000/year benefit to the private health insurer you select. In turn, the insurer is allowed to skim off up to 15% of that $12,000 in admin expenses (i.e., $1,800/yr) though in many urban areas competition may limit that skim rate to 12% or so. That 15% figure relates to the so-called Medical Loss Ratio or MLR. Medicare demands that Medicare Advantage insurers spend at least 85% of your benefit on actual medical services and no more than 15% on overhead & profit. For Obamacare, insurers were allowed as much as 20% overhead & profit and an MLR of 80%.
An enterprising health insurance CEO can skim another 2% or so from Medicare through the Medicare Advantage risk equalization facility. This is designed to compensate an insurer who happens to have a book of customers who are a bit less healthly than average. If it's being done honestly, the money credited to insurers with the sicker folks on their books should roughly be matched by the insurers who happen to have a slightly more healthy population on their books and are returning money to the risk equalization facility.
Regrettably, for-profit health insurers seem to have difficulty identifying the healthy people on their books that would necessitate returning money to Medicare. And there's a real incentive for the insurer to upcode someone with say, "mild anxiety" to full blown "parnoid schziophrenia" if they think the can get away with it. Investigators estimate there's $30 Billion of such fraud over 3 years. It's really one of the sweet spots in US capitalism for a health insurance CEO looking to "increase executive compensation". [LOL]
Medicare Advantage sales agents earn a commission of $500 to $600 on a new Medicare Advantage sale and half that in subsequent years if you keep the plan. It's the most lucrative of private Medicare schemes for the agent.
US corporations are managed for 2 goals, increasing executive compensation and providing shareholder investment returns -- patient health is at best #3. Three large for-profit insurers (USHealthcare, Humana, BlueCross/BlueShield) have captured about 60% of the Medicare Advantage market and pay their CEOs tens of millions of dollars in executive compensation despite running a shop a small fraction of the size of Medicare/Medicaid with its $1.5 Trillion annual budget.
Meanwhile for 2019, traditional Medicare had program costs of $796.2 Billion and spent $785.6 Billion on actual medical services for its 61 million beneficiaries, leaving $10.6 Billion for administrative expenses. That's an admin cost of 1.3%. (See page 10 of the Trustee's Report.) And the Gov't bureaucrat running the Centers for Medicare & Medicaid Services (CMS) makes $165,000/yr and flies commercial. Who's likely providing you with the better deal?
To be fair, Medicare Advantage promoters complain that Medicare "free rides" on the Social Security Administration which maintains the member list and deducts the Part B premium from your monthly Social Security check. Similarly, the IRS collected your FICA payment over your working lifetime -- another "free ride" according to Medicare Advantage devotees.
I don't doubt that the "free ride" argument has merit. But as a taxpayer I'm already paying for the Social Security Administration and the IRS. If they can efficiently collect my monthly Medicare premium and avoid the additional $1,500 to $1,800/year a for-profit Medicare Advantage insurer is going to take from me in excess admin expense, I'm all for it. Would you buy an S&P 500 index fund with an expense ratio 10 or 12 times higher than the Vanguard offering and expect the same investment return? If so, Medicare Advantage may be attractive to you.
Needless to say, I won't be using Medicare Advantage.
Are there no benefits to Medicare Advantage? Some 35% of Medicare beneficiaries choose it. They can't all be wrong.
From what I can see, Medicare Advantage is sold through aggressive marketing, not bought after a detailed examination by the consumer of the arithmetic surrounding it. (Kind of like the way annuities are sold.) [LOL]
Medicare Advantage may be cheaper if you're healthy and don't have much in the way of medical expenses. (Of course, seniors tend to be "healthy" until they aren't -- many will eventually develop some medical problem entailing considerable expense.) And there's always the free "Silver Sneaker" gym membership. (Pre-COVID-19 I imagine at least some people valued that.) It may also be easier to find a primary care physician (PCP) if you choose Medicare Advantage since they typically pay a PCP a "capitated" monthly fee per patient. The less you see the doctor, the more they make. But, of course, that financial incentive is adverse to your interests as a patient.
In the end, any savings you see from Medicare Advantage will be more than absorbed by the higher co-pays and out-of-pocket costs if you get sick. And Medicare Advantage leaves you vulnerable to "surprise billing" and out-of-network costs. Something traditional Medicare forbids, unless you sign a contract with the doctor or hospital up-front agreeing to pay them more.
Medicare supplement (Medigap) plans and Part D drug plans
If you decide against Medicare Advantage, you'll likely want a supplement plan and Part D drug coverage.
Medigap plans come in ten different varieties, Plan A through Plan N. Medigap plans have standardized coverage, so it's easy to comparison shop -- each insurer offers the exact same benefits and coverage, the only difference is the premium charged. Plans F and G are the most popular. Plan F includes coverage for the Part B annual deductible of $198 for 2020 and is no longer available to new Medicare beneficiaries as of Jan 1, 2020. Plan G offers the same coverage as Plan F with the exception of covering that $198 Part D annual dedictible.
Both Plan F and Plan G also offer a high deductible version at a much lower premium where you are responsible for the first $2,340 per year in Medicare Part A and Part B deductibles and copays. If you currently have little in the way of medical expenses, a high-deductible Plan G policy may be attractive. In Washington State where I reside, Plan G monthly premiums range from a high of $274/month to a low of $169/month. The high deductible Plan G premiums vary from $72/month to a low of $44/month. So if we take the low numbers of $169/month and $44/month for the cheapest Plan G policies, it would cost you an additional $125/month ($1,500/yr) in premiums to avoid the $2,340 annual deductible. You'd likely need to be suffering from an expensive chronic illness before the higher cost plan that eliminates the $2,340 deductible makes financial sense.
Over the last several years, the Medical Loss Ratio (MLR) on Medigap supplement plans has averaged in the high 70's (see page 10 of the NAIC report), leaving insurers with an overhead & profit skim rate of 20%-22%. However this skim rate is being applied to a much lower premium. The annual premium on a $44/month high-deductible Plan G policy is $524/yr -- and 20% of that is just $105/year. Big difference from the 15% or $1,800/yr that an insurer can skim off your $12,000 Medicare benefit if you select a Medicare Advantage plan.
Medicare Part D Drug Plans
The Part D drug benefit appears to be the real cesspool of Medicare coverage. There are nearly a thousand for-profit Part D drug plans offered nationwide, each with its own co-pays and drug pricing making it difficult to impossible to shop. At one time the Medicare.gov website had a price comparison tool that allowed a senior to enter the list of drugs they were taking along with the required dosages and get a list of the most cost-effective Part D plans for their situation. But recently, the Trump Administration has monkeyed with it and consumer advocates complain that the tool is giving wrong information.
About 90% of the prescriptions written in the United States are for generic drugs. The expensive, name brand drugs with the eye-popping prices account for a small minority of the drugs prescribed by physicians. Since you can often get better pricing on generics by paying cash at Costco or using GoodRx or Blink, it may make sense to do that and just get the cheapest Part D drug plan offered in your zip code as catastrophic coverage and hope you don't need to use it.
There are 18 Medicare Part D drug plans offered in my Washington State zip code with premiums ranging from $13.20/month to $85.00/month. I'll just go with the $13.20/month plan as catastrophic coverage in the event I ever need a $10,000/month name brand medication and continue to pay cash at Costco for my current list of generic prescription drugs.
In Summary -- what I'm doing
I'm going with traditional fee-for-service Medicare, a high-deductible Plan G Medigap plan with a premium of about $600/yr and the cheapest Part D drug plan offered, that's a premium of about $160/yr at current pricing. And of course, I'll be paying the Medicare Part B premium of about $150/month ($1,800/yr) for a total health premium of about $2,560/yr. The size of the Roth conversions I'll be doing over the 7 years from age 65 to 72 will determine the amount of the IRMAA penalty I'll be paying.
Resources for additional information.
True Cost of Health Care, by David Belk MD
2020 Trustees Report on Medicare
Medicare Advantage Wikipedia
October – December 2020 Approved Medicare Supplement (Medigap) plan premiums (WA state)
National Association of Insurance Commissioners -- 2018 Medicare Supplement Loss Ratios
Comparing Medicare Supplement (Medigap) and Medicare Advantage plans
State Averages for the 2020 Medicare Advantage Monthly Capitation Payments
Medicare Advantage Plans Overbill Taxpayers By Billions Annually, Records Show
Proportion of branded versus generic drug prescriptions dispensed in the United States from 2005 to 2019