Health Insurance in Retirement, Part II: Thinking Through Your Options

This post originally appeared on The Finance Buff.

This is the second in a two-post series on retiree health insurance. The first post explored how to think about future health care costs. This post is about your Medicare-related options.

I have great sympathy for the challenge Medicare eligible retirees face in selecting health care coverage. The number of options is staggering: up to 100 options within Medicare alone and more when you include Medigap and employer-based supplements. To keep this post of reasonable length I will discuss situations that apply to most individuals, leaving aside options only available to certain low income/low asset individuals (Medicaid) and military veterans.

Every Medicare eligible retiree has the following options for coverage of hospital, outpatient doctor, and prescription drug services: fee-for-service (FFS) Medicare, private fee-for-service (PFFS) through Medicare Advantage (MA), or an HMO or PPO through MA. FFS Medicare can be combined with a Medigap policy. Any of the above can be combined with a stand-alone prescription drug plan (PDP) except for an HMO or PPO (some of which offer a drug benefit). Additionally, some individuals have employer-based options. (Anyone already confused, see this.)

The following table lists options and some advantages and disadvantages of each. In the table, references to “stability” mean the type of plan is not likely to disappear from one year to the next. “Basic benefits” are those required by Medicare. “Enhanced benefits” means coverage of additional services, like hearing aides, eye glasses, or prescription drugs.




FFS Medicare Unrestricted doctor choice, stability High cost sharing, no drug coverage, only basic benefits
PFFS (MA) Unrestricted doctor choice, enhanced benefits, low premium and cost sharing Expected lack of stability in counties with other MA options; possible lack of stability elsewhere.
HMO, PPO (MA) Enhanced benefits, low premium and cost sharing Restricted doctor choice, potential lack of stability, less so in urban or near-urban counties
Medigap (w/ FFS only) Enhanced benefits, low cost sharing, stability High premium
PDP (cannot be combined with an HMO or PPO) Low premium, stable Formulary can change at any time, donut hole

Assuming all else equal, the best bargain today for coverage of services beyond basic Medicare benefits is found in an MA plan (HMO, PPO, or PFFS). The only source of drug coverage outside of an MA plan is through a PDP (ignoring any employer-based benefits), but, in general, one will receive better drug coverage through an MA plan than through a PDP. But, all else is not equal. As the above table shows, one gives up either stability or unrestricted doctor choice, or both with an MA plan. However, one can try an MA plan and later switch to a Medigap plan. (In general one does not have unrestricted access to Medigap after the first six months of Medicare eligibility. However, one of the exceptions is when switching out of an MA plan within the first year.)

Under current law, the availability of the PFFS option will change substantially in 2011. The Medicare Improvements for Patients and Providers Act of 2008 forces PFFS plans out of areas where HMOs and PPOs operate. So, if you live in an area with other MA plan types, don’t expect PFFS to be available in two years’ time.

Given the above, my generic recommendation to those without an employer option would be to give an MA plan a try. If you don’t find it acceptable, then consider Medigap (with a PDP if you want drug coverage). If you do have an employer option then my recommendation would be to investigate what your enrollment options are. If you decline enrollment initially, do you have the right to enroll later? Also consider the benefits and costs as compared to a Medigap or MA plan. If the employer plan is not substantially better than you may not lose much by declining it.

Finally, if you’re in an area where MA plans are not stable then you should be careful about enrolling in one if you must give up your only chance to enroll in a potentially more stable employer option to do so. This Excel spreadsheet provides a way of evaluating the stability of MA plans in your area. In it I have listed for all US counties and all years 1993-2009 whether an MA plan was available in each county-year. I excluded PFFS plans since they didn’t exist before 2001 and their availability will change a lot in two years (as explained above). You can see for yourself if non-PFFS MA plans have tended to be stable or not in your county over this time period. (Past stability or lack thereof is no guarantee of future plan behavior.)

Below are some other resources for studying Medicare-related health plan options and learning more about specific plan types and offerings of specific insurance companies. I strongly encourage anyone making a Medicare plan decision to consult these resources as there are many important details and considerations that I did not cover.

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