I am often asked whether Medicare is as good a buy as health insurance purchased through an employer.
So, here is a one-word answer accompanied by long-winded analysis.
Question: Is Medicare more expensive than a typical employer sponsored plan?
Annual insurance premiums covering a 65-year-old couple through an employer’s group plan are approximately $16,000. (Note that premiums in a group type plan are based on a 45-year-old healthy male.)
The following is a breakdown of Medicare costs (for equivalent coverage) for a couple that earns less than $170,000 in total retirement income:
Basic Medicare Coverage
Medicare Parts A and B (hospital and doctor visits)
Middle of the road Medicare Part D (drugs) plan
Supplemental insurance premiums based on state average
Grand Total Range
$5,441 to $6,990
The total annual premium cost of Medicare (plus supplemental insurance), based on the four states above, range from $5,441 in Hawaii to $6.990 in Maryland. Should this couple have jointly earned above $428,000 in one of the last two years of employment, year-one healthcare premiums would likely exceed $14,000 because of “means testing.”
In a nutshell, regardless of state of residence and income level, Medicare offers equivalent health insurance at a reasonable price compared to employer sponsored plans.
However, often lost in translation is the fact that employers cover 70 to 75% of that $16,000 premium. Thus, employees with family coverage will see $4,000 to $4,800 deducted annually from their paychecks in small weekly increments. This system simply does not have the same economic or psychological impact as a retiree writing a $6,000 check out of his/her life savings. And consider this: these are year-one costs. Unfortunately, retirees can anticipate around a 6% to 7% annual increase in these costs each year.
Whether one is receiving health insurance benefits from Medicare or an employer, out-of-pocket costs, such as co-pays, also exist. Expect this year’s additional out-of-pocket costs for retirees to range from around $1,500 to $2,000 depending on state of residence. It is also fair to assume that these costs will also rise by 6% annually.
Given the expected inflation rate on healthcare costs, by the time this couple celebrates their 80th birthday, annual healthcare expenses may exceed $24,000.
All things considered, Medicare is a good buy in comparison to an employer-based plan, but over time, it is likely that the total cost of healthcare may be greater than net income generated from Social Security.
Next Question: Is a better alternative available?
Answer: Without prevarication, the answer is no.
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