Managing the out-of-pocket costs of Medicare

Tamara E. Holmes


Millions of Medicare recipients are facing a shaky financial future. Why? More than half of Medicare recipients are financially unequipped to handle out-of-pocket costs in the last five years of their lives, according to a recent study.

The study, conducted by researchers at Mount Sinai School of Medicine in New York, found that 25 percent of Medicare recipients spend more on out-of-pocket health care expenses than their assets -including their houses - are worth. Another 43 percent of Medicare recipients spend more than their total assets, not including their homes. The Mount Sinai study is not the only one to paint a grim picture for Medicare recipients. A Fidelity Investments study released in May 2012 found that a 65-year-old couple should expect to spend $240,000 to cover medical expenses after retirement.

"The bottom line for older adults and their families is that they should be aware of the possibility of these expenses and consider this when making financial and savings plans for the future," says the study's lead author, Amy Kelley, assistant professor of geriatrics and palliative medicine at Mount Sinai School of Medicine.

Limitations of Medicare

While Medicare provides significant coverage to people over 65, it doesn't cover such things as co-pays, deductibles, home care services or non-rehabilitative nursing home care, Kelley says. The study also found that out-of-pocket costs varied widely by disease. For example, Alzheimer's disease was among the most costly ailments, with patients averaging $66,155 in out-of-pocket costs in the last five years of their lives. In comparison, patients with gastrointestinal disease or cancer averaged $31,069 in out-of-pocket costs.

Since home care and custodial care in nursing homes are two of the biggest expenses for people with chronic, disabling conditions who are in their twilight years, long-term care insurance is something people should look into, says Lee Goldberg, the vice president for health policy of the Washington, D.C.-based think tank, the National Academy of Social Insurance.

However, long-term care insurers can deny coverage to those with major health problems, so it's best to purchase a policy in your 50s when you're more likely to be relatively healthy, according to the American Association for Long-Term Care Insurance. While rates vary among insurers, the average cost of long-term care insurance for a 55-year-old single person was $1,480 a year, according to the association's 2011 Long-Term Care Insurance Price Index.

Seniors also should consider Medicare supplemental insurance coverage, which pays for costs not covered by Medicare, such as deductibles and some medical services, says Mary Kesel, founder and president of Benefit Advocates, a North Carolina company that helps employees and individuals choose health care benefits. In addition, Medicare recipients must buy separate prescription drug coverage through a plan that's run by an insurer or another private company and approved by Medicare. Both supplemental insurance and prescription drug plans differ by price and coverage. However, before selecting any insurance plan, call your doctor to make sure that he or she accepts the coverage, Kesel says.

If you have a high-deductible health insurance plan and you're still working, you can open a health savings account (HSA) and put tax-free dollars aside for out-of-pocket medical expenses. Fidelity recommends HSAs for people approaching retirement age, as well as other savings and investment vehicles such as individual retirement accounts (IRAs) to stash enough money for health care costs.

Reducing the costs

Insurance plans aren't the only way to ensure that you can get a grip on health care costs as you age. Here are three other ways to cut down on health care costs.

  1. Take generic medications. Seniors can spend less on prescriptions and keep more money in their pockets by using generic drugs, which perform like brand-name drugs but cost substantially less, Kesel says.
  2. Ask your doctor for low-cost alternatives. Some medical tests aren't needed after a certain age, Kesel says. Ask your doctor what would happen if you don't take a particular test, or whether there's a less expensive medical test available.
  3. Consider hospice care. Since most health care expenses are racked up near the end of someone's life, people can consider hospice care - Medicare-covered care provided to terminally ill patients - as an alternative to expensive stays at rehabilitation centers and nursing homes, Kesel says.