Many people assume Medicare will cover most all of their health care costs, while Medicaid, the health care program for the poor, will cover them when they have depleted their assets and are in need of nursing home care. But neither program guarantees a low-cost ride through the years of elderly health care. Research has shown that seniors can expect Medicare to cover only about half of their medical expenses, on average. According to Fidelity Investments, the average senior retiring at age 65 this year will need $240,000 to pay the out-of-pocket costs of health care for the rest of his or her life. But a new study from the Employee Benefit Research Institute finds that depending on gender, health costs could be much higher. For instance, a 65-year-old woman today would need as much as $450,000 during her retirement years for health care costs if she wants to have a 90 percent chance of having enough money for health care. A 65-year-old man would need as much as $378,000 during his retirement years in order to have the same 90 percent chance of having enough money for health care. It's important to know what to expect from Medicare and Medicaid and ways to reduce personal expenses.
Seniors and out-of-pocket expenses
Seniors spend more per capita on out-of-pocket health care expenses than any other age group. The 2004 National Health Expenditure Survey found that seniors age 65 and over spent an average of $4,888 per capita annually out of pocket for deductibles, copayments, premiums and other health care expenses not covered by insurance. Their spending is more than twice as high as the average non-elderly adult. The largest expenditures occurred among those 85 and older, who spent an average of $8,304, compared to $5,066 for seniors ages 75 to 84, and $3,851 for those 65 to 74.
Current tax law allows out-of-pocket medical expenses to be deducted from federal incomes taxes if they exceed 7.5 percent of the filer's adjusted gross income. This includes any medical bills incurred by spouses or dependents, as well as a wide range of expenses, including dental and vision care.
Seniors and Medicare
There are three potential cost components to the Medicare program for seniors. Part A, which covers inpatient hospital stays and rehabilitation, is paid for through all employees' payroll taxes, but seniors still face copays and deductibles. For inpatient hospital care, the deductible for 2009 is $1,068, up $44 from last year. After 60 days, beneficiaries are subject to coinsurance charges of $267 per day, with an increase to $534 per day after 90 days. After 90 days, however, a patient can use an additional 60 "lifetime reserve" days that Medicare provides; once the reserve days are used, the patient is responsible for the full amount of the bill.
Part B mainly covers physician services and is partially paid for through premiums deducted from seniors' Social Security benefits checks. Part B premiums increase based on household income: For 2009, married couples with adjusted gross incomes of $170,000 or less and singles with adjusted gross incomes of $85,000 or less pay $96.40 per month. Couples and individuals with higher incomes will monthly premiums ranging from $192.70 to $208.30. In 2009, the deductible for Part B insurance is $135, the same amount as in 2008.
Part D, the prescription drug benefit enacted in 2006, is provided by private insurance plans approved by Medicare. Premiums vary by plan and geographic area, but the monthly average is about $24 and the average out-of-pocket deductible for 2009 is $295. However, there is a so-called "donut hole" in Part D plan benefits. Once seniors have used $2,700 in drug benefits, they pay the full cost of drugs until they spend a total of $4,350 out of pocket.
In addition, there are potentially expensive "Medigap" plans available to fill the coverage gaps in Parts A and B. Although Medigap plans are sold by private insurers, they are standardized to meet federal regulations. There are 12 different Medigap plans (A thru L), each with specific coverages that can be easily price-compared among insurers. Several studies have found that Medigap plan premiums vary widely among insurers and states even when comparing the same plans, so it is best to shop around.
Many lower-income seniors turn to Medicare Advantage plans offered by private insurers. The coverage is more comprehensive than traditional Medicare, but enrollees pay only a single, government-subsidized premium. The only stipulation is that some Medicare Advantage plans require seniors to see certain doctors, similar to an HMO or PPO. The Obama Administration has indicated cutting the government subsidy to insurers for Medicare Advantage, which could potentially drive up costs for the 9 million seniors who are on such plans.
Seniors and Medicaid
When they retire, most Medicare enrollees do not meet Medicaid income and asset tests for long-term care coverage. However, Medicare has annual and lifetime maximum benefits for nursing home care, which it provides mainly for rehabilitation following injury, illness or surgery. Seniors in need of long-term (nursing home) care who max-out their Medicare coverage, or those who need custodial care rather than medical treatment, must pay the cost out of pocket. Seniors who exhaust their assets paying for nursing home care may be eligible for Medicaid to pick up the cost, if their incomes are low enough. Although long-term care is an optional benefit, it is one of the fastest growing areas of state Medicaid spending. In fact, Medicaid picks up the tab for about 42 percent of aggregate nursing home costs. [See Figure III] Every state provides this benefit, and not just to the poor. Medicaid is paying for the care of a growing number of middle-class seniors, due to the fact that many seniors purposely spend down their assets to qualify. It is somewhat surprising that more seniors are qualifying for Medicaid long-term care coverage, since the poverty rate among seniors is the lowest of any age group. Furthermore, as a group, seniors have more assets than any other age cohort. According to the U.S. Census Bureau, at all income levels individuals reach age 65 with more household wealth than at any other time in their lives. Wealthier seniors arguably have enough assets to cover the cost of all but the longest nursing home stay. Senior households aged 65 and older have assets worth an average of $108,885, including home equity.
There are several methods that allow individuals to legally impoverish themselves. They can transfer assets to their children, divorce, and set up irrevocable trusts. Also known as Qualified Income Trusts, these trusts allow seniors to assign their investment income to the trust, which is designed to limit how the funds are distributed. Trust funds can be used to make certain payments including insurance premiums, support for a spouse, and $60 per month for personal needs. These trusts effectively allow people to hold back income that otherwise would go to reduce Medicaid's cost for long-term care.
Another strategy to transfer assets is a divorce where the "well spouse" retains joint property while the "ill spouse" receives little of value. Choosing a good nursing home is also important. Seniors can secure places in more expensive, higher-quality nursing homes by proving they have sufficient funds to pay for at least one year of care. Once their funds are exhausted, they generally cannot be discharged because of inability to continue paying their bills. At this point they apply for Medicaid. The facility typically accepts the Medicaid reimbursement, while providing care at a loss. To the senior, this is preferable to the typical Medicaid nursing home.
For seniors following these strategies in order to have Medicaid pay for their long-term care, advanced planning is important: they must make their financial arrangements several years before the need arises. Advanced planning is important because when a state is determining the eligibility of a senior for Medicaid coverage, federal law allows it to "look back" and include as assets any funds that a senior transferred within five years of applying for long-term care benefits.
Seniors eligible for Medicaid long-term care benefits can keep a house and a car -- but their home equity cannot exceed $500,000. Their financial assets cannot exceed $2,000 for singles and $3,000 for couples. They cannot have transferred assets to other family members within five years of applying for Medicaid. To discourage beneficiaries from hiding assets, new federal laws have expanded the assets counted in determining eligibility. However, at-home spouses are allowed a monthly income of 200 percent to 300 percent of the poverty level.
In order to encourage seniors to rely less on Medicaid, many states have implemented private-public long-term care partnership programs. Seniors purchase a minimum level of private long-term care insurance. If their private coverage runs out, Medicaid will cover their long-term care costs without requiring them to spend down all of their assets. When a policyholder enters a nursing home he or she first relies on the insurance. When the insurance is exhausted, special eligibility rules allow them to receive Medicaid benefits while retaining assets equal to the value of the policy.
For example, in California and Connecticut partnership programs, individuals purchase coverage from a number of competing private insurers. For each dollar of coverage, they protect a dollar's worth of assets. A long-term care policy with $120,000 in benefits allows an individual to shelter $120,000 in assets and still qualify for Medicaid long-term care. Since most nursing home stays are less than one year, very few of those who have purchased policies have applied for Medicaid benefits. In some states, partnership policies are required to cover additional years. New York, for instance, partnership plan must cover the cost of three years of nursing home care or six years of at-home care -- potentially, $200,000 worth of services. In return, participants can shelter all their assets, not just an amount equal to the coverage received. Some states use a hybrid of the two.
Private sector plans may appear less generous on paper than the current Medicaid program, but they usually allow enrollees to access a greater range of providers and facilities.
Medicaid nursing home care is not for those who want to maintain a higher standard of living or leave some assets to their heirs. However, there still remains little incentive for individuals to purchase private long-term care insurance, and few benefit from the current tax deduction: At the federal level, private long-term insurance premiums are only partially tax deductible, and only if out-of-pocket health expenses exceed 7.5 percent of the filer's adjusted gross income, as previously mentioned. IRS rules allow a larger portion of the premium to be deducted as the age of the senior increases, limited to $3,980 annually after age 70.
Meeting retirement health care costs
In general, retirees are not eligible for Medicare until they reach age 65, even if they apply to receive Social Security benefits earlier. Thus, it is important to consider the cost of health care before taking an earlier retirement. Older workers who have recently found themselves laid off might consider COBRA [Consolidated Omnibus Budget Reconciliation Act] coverage. COBRA allows involuntarily terminated workers to stay in their employer's health plan for up to 18 months, provided they pay the premiums. Although COBRA is usually cheaper for this age group than individual health insurance, it still averages over $4,500 a year.
For seniors on Medicare, they can still look for ways to reduce their health care expenses. Many seniors can avoid the Part D coverage gap. Medicare.gov is a Web site seniors can use to estimate their monthly costs for drugs and premiums under different Part D plans. It also offers suggestions for therapeutic substitutes that may cost less than prescription drugs.
Public policy changes should be made. These include using health insurance retirement accounts to provide current workers with incentives to partially prepay future Medicare costs through savings. Seniors could also save for post-retirement medical expenses if they were allowed to continue funding a health savings account after they reach age 65.
Finally, premiums for private long-term care insurance should be tax deductible, regardless of the purchaser's age, or how much of a household's adjusted gross income goes toward health care costs.
