Insurance premiums a burden in retirement
The Urban Institute
January 2005
Understanding Expenditure Patterns in Retirement
By Barbara A. Butrica, Joshua H. Goldwyn and Richard W. Johnson
Health Care Expenditures
For typical older adults, budget shares for health care expenses are second to housing costs. However, health care expenditures warrant special attention because they tend to be much more unpredictable than housing costs, especially for those without private supplemental health insurance.
In this section, we break out the health care expenditures of older adults. Health insurance premiums represent the largest health care spending category (8 percent of total expenditures) for married individuals. Additionally, they spend 6 percent on prescription drugs, 4 percent on health services, and 1 percent on medical supplies. This finding is consistent with Rubin and Nieswiadomy (1997) who found that the increase in health care expenditures between the 1980s and 1990s was driven primarily by insurance premiums, followed by drugs and medical supplies, and health services.
Older married adults in poor health allocate twice as much of their overall spending to prescription drugs than those in excellent or very good health. As expected, individuals with nongroup insurance spend a larger-than-average share of their overall expenditures on health insurance premiums, but they also spend a larger-than-average share on prescription drugs. These patterns are very similar for nonmarried adults.
http://www.urban.org/UploadedPDF/411130_expenditure_patterns.pdf
Comment: It is important to realize that health insurance premiums represent the largest health care spending category in retirement. For many individuals, the premium paid is for Medicare supplemental insurance (Medigap). With the decline in employer-sponsored group coverage for retired individuals, the need for Medigap coverage is increasing.
It is instructive to look closely at the actual benefits provided by the Medigap plans. For most individuals, the amount of claims payment for which the insurer is obligated is nominal. That is because, by Medicare regulations, most of the balance of the medical charges must be adjusted off by the provider of services. Medigap pays only that small amount which is the difference between the Medicare payment and the Medicare allowed charges, an amount far less than the charges billed.
With typical PPO plans, such as those offered by Blue Cross and Blue Shield, the premium pays not only for the allowed charges, but it also pays for the insurer’s administrative costs in contracting with providers for lower rates. With Medigap plans the allowed charges are set by Medicare, so the insurer is providing almost no additional value when it offers lists of contracted providers. And since the primary payment is made by Medicare, the Medigap plan is paying only the very modest coinsurance and deductible.
This Urban Institute study confirms that health insurance premiums in retirement are very significant. Yet the Medigap policies offer amongst the poorest values in health care coverage. Using my own coverage as a typical example, the Senior Classic F Medigap policy of Blue Cross of California had a loss ratio of 62% (2001). That means that they kept 38% of the premium.
That administrative waste is on top of the administrative burden that our fragmented system places on the providers of care. The combined administrative waste amounts to over one-half of the Medigap premium!
Medigap policies are only one more example of the private insurance industry fulfilling its mission to sell us excessive, wasteful administrative services, in this instance placing a major financial burden on retired seniors (and anger each time the premium notice arrives). We can do far better financially by throwing out the private plans, fixing Medicare so it works better, and then establishing Medicare for All.