May, 2008
by Dr. Thomas E. Bell, CMG Member, Michelson Awardee (Retired)
Maybe you've been a bit worried about what you'll do for medical coverage when you're older - like, when you retire. But there's always Medicare, you think - whatever that is. The politicians repeatedly tell us that medical care costs a lot, especially if you're older. Surprisingly, coming from politicians, the statement is actually true. Because of the concern many of you have expressed about medical care, this installment in the series will be longer than usual.
The rate of inflation for medical costs significantly exceeds the CPI-U (Consumer Price Index for Urban consumers). In large part this is because of new (and expensive) medications, treatment options, and life-prolonging successes. From your personal point of view, the rate of medical cost inflation is probably no more important than the increase in your annual medical needs as you age. You probably don't need to worry about child-birth costs, but you'll find (if you're like me) that you have a new set of problems to face as your body wears out. (I have high blood pressure, problems with my back, and floaters in my eyes; all but the last are treated with inexpensive medications, but your problems may be more expensive.)
As a rough indication of conventional medical insurance, my wife (at age 64) was able to obtain medical insurance on a group plan at the rate of over $10,000 per year - with a deductible of $5,000. I suspect that very few of CMG members realize the cost to their employers of their medical coverage - maybe $8,000 per spouse for a minimal-deductible plan while you're younger than we are. If you're thinking of retiring early, think about $16,000 for you and your spouse plus more for the kids. (Shutter, shutter, queasy shutter)
When I was nearing 65, I tried to stick with my old medical plan because I'd been happy with it (through the IEEE). But (as they confirmed over the phone) Medicare offered a much less expensive alternative. So I've been on Medicare since age 65 (about 2 years), and my wife has been on it for less than a year because she's a bit younger than I am.
You probably don't want to "run naked" (without any medical insurance) at any time - but especially when you're older. One of the biggest problems is that hospitals generally charge non-insured patients prices that are significantly (outrageously) above the prices that they charge insurance companies and Medicare. Perhaps this nonsense will end as politicians change the medical cost environment, but at the moment an uninsured individual has a real exposure to the price structure of hospital care.
At one time (when I was about 55), I was faced with a potentially life-threatening medical problem with my wife. She had colon cancer, and she needed surgery to keep her alive (just before we were to adopt two kids). We had the insurance to cover her medical expenses, but the hospital (which, as a Christian, I have tried to forgive) told me that they could not find the insurance number after the surgery, so they would throw her out of her bed immediately, and let her walk down the street (if she could walk). Her surgeon's office knew better than to be intimidated and told me what to do. So I gave them the policy number again with some helpful words (not to be repeated here in the interest of propriety), and no such nonsense occurred.
You really don't want to experience this kind of situation without a means to protect your family. (Having a family member facing death is one of the worst things you can imagine, and I've had to do so more than once.) Assuming that you want to cover your loved ones with insurance that is recognized by even the intellectually-disabled administrators of hospitals where your loved ones may be admitted, you need to know about Medicare if you or your spouse is over 65. (As pointed out by a member of the CMG Board of Directors, you also need to know about it if your parents are over 65; you may need to worry about them also.)
If (after age 65) you have an employer's corporate plan that protects you with equal, or better insurance than, Medicarei, then your biggest issue may be to ensure that you have an annual statement from the insurance company saying you have coverage equal to, or in excess of, the coverage of Medicare. Then if you need to go on Medicare in the future, you won't be faced with a big penalty - year after year. (Do you get the message - that you need to make sure you protect your options?)
Here's how it works: The US Government subsidizes medical insurance for certain disabled individuals and everyone who has reached 65 years of age. (This generally applies only to citizens and legal immigrants.) Medicare has "Parts". The parts aren't numbered one through four; they are identified as Part A, Part B, Part C, and Part D. In addition, the coverage for each of these Parts has deductibles and upper limits. The deductibles can be reduced and the limits can be increased by Medicare Supplemental Insurance (usually called Medigap insurance).
In general, the four Parts and Medigap programs are as followsii:
PART A: Hospital insurance. This is for hospital charges, but not for your doctor's charges or medications (drugs). It has a deductible and a limit on coverage. Currently, you can receive this coverage without additional charge if you (or your spouse) have paid into Social Security for at least 40 quartersiii. Having this coverage generally limits your exposure to outrageous hospital charges. Unless you have fewer than 40 quarters of earnings, all the costs of Part A are paid by the Federal Government.
Part A has limits on coverage (as does most medical insurance); it does not cover long-term care. Separate, private insurance is needed for that. The article contributed in this issue of MeasureIT (May 2008) by Joe Delano describes Long-Term Care Insurance, and more information is available on the insurance and the costs of care in a Genworth Financial surveyiv. The State of California even has a pop quiz for youv. Concern has been raised about increases in premiums and whether legitimate claims will be paid, so you should examine those issues toovi.
PART B: Medical insurance. This pays for doctors' bills. It also has a deductible as well as limits on coverage. This Part is optional, and you will be charged monthly for this coverage (currently $96.40 per monthvii). Nearly everyone covered by Part A (about 43 million individuals) has chosen to be covered by Part B as well (about 40 million); the remaining 3 million may have other insurance, may be participating in more innovative medical plans, or may have other characteristics that I don't know about. The Federal Government pays about 75% of the costs of Part B, and individuals pay about 25% through their monthly charges.
PART C: "Medicare Advantage" programs. These are like HMOs which include Part A and Part B coverage (and may include Part D). These programs are under attack because (although they generally provide better preventive care), they cost the government more than the conventional Part A and Part B coverage. Far more people are enrolled in Part A and Part B than are enrolled in Part C.
Part D: Medications (drugs). Part D has many providers who offer differing coverages and costs. The offerings and costs vary by geographic region, specifics of the plans, and their costs. About 75% of the "standard coverage" costs of Part D are paid by the Federal Government, and the states also pay some of the costs.
Medigap: A predefined set of programs, specified by the government, are offered by private insurance companies. The individual pays for the costs of these programs, and the charge for the same program may be far higher from one company than from another. (I haven't been able to understand the justification for the wide variation, and I'm quite happy with the rather inexpensive alternative that I chose.)
In general, the Government is quite sensitive about whether Medicare is the primary provider of medical insurance or the secondary provider (in cases where an individual has a provider in addition to Medicare). In the interest of reducing its costs, the Government wants to be the secondary provider so it only needs to cover costs beyond the other insurance. I have never dealt with this issue, so I really can't help people cope with it.
If you reach 65 before Medicare is changed (as it probably will be), then you need to decide whether you will select a "Medicare Advantage" program (Part C) or will take Part A and Part B. (If you delay enrolling for Part B and don't have equivalent or better insurance, you'll be penalized at the rate of 10% for each year of delay.) Because I waited so long to start thinking about Medicare, I just decided on Part A and Part B instead of Part C. If you're over 55, you should look at the alternatives STARTING NOW so you can be informed before you need to make a decision. (By understanding the alternatives, you'll also be able to follow the debate about what the Federal Government should do regarding Medicare.)
When you or your spouse reach age 64 years, 9 months, you really should call the Social Security Administration - whether or not you intend to apply for any of the Medicare Parts. My wife and I have found the SSA folks who assisted us in applying were extremely polite and helpful. To protect yourself, you may need to take actions so you can avoid being slapped with that penalties for Part B and Part D. In addition, if you have employer medical insurance, you need to find out the latest information about handling which insurance is primary and which is secondary, and what kind of certificate(s) you may need. (Again, do you get the message that you need to protect your options?)
You probably want to select an insurance plan for drug (Part D) coverage. Failure to obtain coverage when you become eligible will result in an increased monthly charge if you need it later (1% of the average monthly charge for each month of delay). In general, each insurance company covers different drugs with different co-pays (although there is a large amount of overlap). Some of the plans have an annual deductible, and some don't. Some cover the "doughnut hole" (a gap in coverage as your annual drug costs increase) and some don't. Very frequently, the companies want you to obtain the medications directly from their internal (mail-order) pharmacies. In general, participants have been reasonably pleased with the Part D (even though there was some confusion during its start-up).
In addition to understanding the characteristics of each of Medicare's Parts, you'll need to look at the Medigap Programs. There are currently fourteen different Programs definedviii, but even after choosing a Medigap Program you'll need to select an insurer.
If you're close to retirement, you'll probably need to make decisions about the Parts of Medicare; private insurance is just too expensive to choose as an alternative unless it's covered by a current or previous employer (or someone else). The effects of your choices will have a large impact on your lifestyle, so you need to begin studying them immediately.
There's a comfortable way and a very uncomfortable way to look at how much you should budget to cover your retirement medical care (at least after you reach 65). The comfortable way involves computing what Medicare, Medigap, and perhaps a bit more medical service costs now; I'll do that below. The uncomfortable way to do the computation is to recognize that the US can't pay for the current structure of Programs when all the Baby Boomers reach 65, and try to envision what might result; I'll do a bit of that after the comforting computation.
At the moment, my personal medical costs (largely medical insurance costs involving Medicare and associated Programs) are pretty moderate. The annual, comfortable costs are about as follows:
That's a dramatic reduction from a bill of over $10,000 that private insurance used to cost me, especially when the big deductible for the private insurance is considered. Of course, we want to cover my wife too, so the total is twice the value computed above. Our total medical cost is therefore about $6,800 per year. That total is something we can handle, especially after both of us receive Social Security payments (starting in June of 2008).
Now it's time to do the uncomfortable analysis. The basic problem is that the Baby Boomersix will soon be reaching 65 and become eligible to receive medical services through Medicare. They will also need an increased level of medical services, so there will be a dramatic increase in medical needs and the money to finance it. Detailed projections have been done by the Federal Government showing an unsustainable financial impact, and I haven't seen any claims that they are in error. (Instead, there has been great enthusiasm in avoiding the topic because the implications are not nice, and certainly won't help you get elected.)
A recent explanation of the Federal Government's budget situation titled The Nation by the Numbers: A Citizen's Guide A Summary of the FY 2007 Financial Report of the U.S. Governmentx summarized the impacts of the major entitlements (on page 5) as follows:
"Simply said, holding revenues constant, required Medicare, Medicaid, and Social Security spending and the related deficit financing costs will far exceed the Government's ability to pay."
More detail of the situation is provided by the Social Security and Medicare Boards of Trustees in their summary of the 2008 Annual Reportsxi. The graphic below is Chart B from that report; it shows the projected expenditures for Medicare and Social Security through the years as a percentage of the Nation's Gross Domestic Product. (Discussions of Social Security and other pensions will be presented in a later installment of this series.)
Note how OASDI (Old Age, Survivor, and Disability Insurance - Social Security) keeps growing until about 2030, and then levels out. What's happening here is that the last of the Baby Boomers (born in 1964) will reach 65 in 2029, so new claims will smooth out after that.
Note also how Medicare expenditures just keep going up. (The red line shows Medicare, with HI short-hand for Part A, and SMI short-hand for Parts B and D.) Currently (in 2008), Medicare costs about 3% of the GDP, but it will grow to about 4.3% by 2020 (about half way through the Baby Boomer generation) and to about 6.1% by 2030 (just after the last of the Baby Boomers reach age 65). Of course, medical costs will keep increasing faster than general inflation, and older consumers will keep taking more and more medical services. So the costs will keep going up, far beyond the costs of Social Security.
With Medicare taking an increasing portion of the entire US GDP, dramatic tax increases may be needed. However, resistance to this dramatic inter-generational transfer of wealth (from working citizens to retired ones) will certainly result in a search for alternatives. An idea that has already been suggested is to have the current Medicare subsidies only for "those that really need them" and require "those who can pay their own way" to pay their own medical costs. Translated, this suggestion means that people who have not saved (or saved inadequately) for retirement will continue to receive Medicare subsidies; those who have saved will be required to pay their own way (and possibly more).
When might such a suggestion be implemented? No one knows whether, when, how, or how much it might be; possibly just running big budget deficits and associated inflation would be implemented first. However, for planning purposes, it might be prudent to assume at least $10,000 per year in 2007 dollars for each spouse.
And that's not a very comforting amount if you've only assumed $3,400 per spouse. I guess you should have begun saving earlier and more extensively. (I should have too).
Beyond the nicely-quantifiable costs of medical care for the retired generation, a real issue remains: Will enough medical practitioners (e.g., doctors, technicians, and nurses) be available for the elderly? If you've hoped that this is an unanswered question so you don't need to worry about it, you're about to be disappointed by that nasty Dr. Bell who keeps looking for reality.
The initial results of a private study (in semi-final form) have just become available in a report titled: Retooling for an Aging America: Building the Health Care Workforce . (I'll bet you have already anticipated that the situation is not as nice as you'd like; if not, your eyes must have glazed over.)
The Summary to that report begins with the following words:
In 2011 the first baby boomers will turn 65, ushering in a new generation of older Americans. The 65-and-older population of the future will be markedly different from previous generations, with higher levels of education, lower levels of poverty, more racial and ethnic diversity, and fewer children. Their most striking characteristic, however, will be their numbers. The aging of the baby boom population, combined with an increase in life expectancy and a decrease in the relative number of younger persons, will create a situation where older adults make up a much larger percentage of the U.S. population than has ever before been the case. Between 2005 and 2030 the number of adults aged 65 and older will almost double, from 37 million to over 70 million, accounting for an increase from 12 percent of the U.S. population to almost 20 percent. While this population surge has been foreseen for decades, little has been done to prepare the health care workforce for its arrival.
Older Americans use considerably more health care services than younger Americans and their health care needs are often complex. The health care system often fails to deliver high quality services in the best manner to meet their needs. Indeed, the education and training of the entire health care workforce with respect to the range of needs of older adults remains woefully inadequate. Recruitment and retention of all types of health care workers is a significant problem, especially in long-term care settings. Unless action is taken immediately, the health care workforce will lack the capacity (in both size and ability) to meet the needs of older patients in the future.
Do you believe that public funds will be allocated to ensure that "action is taken immediately" when the problem won't be really obvious for three to 15 yearsxiii? If so, you've been listening to a different set of politicians than I have. Instead of allocating more funds to recruit and retain additional medical personnel for treating the elderly, the thrust is to reduce Medicare and Medicaid payments to personnel who treat older people. The report points out the disincentive to people who might specialize in geriatrics - a better financial future can be pursued in nearly any other medical field.
The report appeals for using improved models of medical delivery to accommodate the need of the elderly to have multiple types of care simultaneously in order to deal with the common situation of individuals having multiple chronic diseases. Instead of such radical changes, I mainly observe demands that more money be spent on the same system that's reportedly not doing a very good job today. I'd love to be amazed that a bunch of politicians noticed that it won't help much to extend the current Medicare system (say, by more funding or by extending benefits to more people), but I suspect that I need to make my own plans to protect my spouse and me.
Because of the huge costs and loss of personal dignity associated with "heroic medical means" to prolong the last few months of life, my wife and I have had documents drawn up to reject this option. Our intention is to avoid bankrupting each other and to avoid loss of dignity during our final days. You might also want to consider that approach.
A larger issue that each of us needs to focus on is that many significant medical conditions can be avoided with proper nutrition, exercise, and preventive care. I know about the need to avoid obesity, but I don't do a very good job of chasing it away; at least I eat lots (and lots) of salads and fruits. I resisted my doctor's urging to deal with high blood pressure (hyper-tension) until I realized that my days would be severely limited unless I gave in. At least I rejected expensive (and risky) treatments of my back problem in favor of inexpensive medications.
Belief in the power of modern medicine to cure even life style (self-induced) diseases is dangerous. Even if treatments are known, there may not be funds or personnel to apply them to you when you need them. You need to be taking your own actions to protect your health instead of hoping that doctors can recover it before you die.
All this material on medical care for the retired may appear depressing. OK, it is depressing. But there's actually a great deal more to say about the topic, and at least one future installment in this series will add other considerations and opportunities.
I waited way, way too long to get serious about understanding what issues I face, and how I should address them. Now I'm working on developing alternatives based on various possible changes in Medicare and changes to the general medical care system. If I come up with some useful suggestions, I'll let you know. (And keep your options open. Did you get that message?)
If you'd like to reach Joe Delano or me, please put [CMG] at the beginning of your Subject Line. Our e-mail addresses are: