Bob’s Journal for 11/21

What to Know About the Late-in-Life Loophole for Medicare Advantage Plan Members

A number of Medicare beneficiaries switch from Medicare Advantage plans to original Medicare in the last year of life, saving themselves a lot of money, obtaining care they might have been denied and costing Medicare a lot of money.

Those are the findings of an analysis of Medicare data by The Wall Street Journal.

Many people opt for Medicare Advantage plans because the plans reduce their out-of-pocket costs when they are relatively young and healthy.

The alternative is to enroll in original Medicare and purchase Medicare supplement and Part D prescription drug insurance policies.

An Advantage plan covers most of the gaps in original Medicare Part B and often provides additional benefits. Most Advantage plans charge low or no premiums above the Part B premium, allowing the beneficiary to avoid the premiums for Medigap and Part D policies.

But beneficiaries often need additional medical services later in life, and their medical expenses rise. Then, Advantage plans carry higher out-of-pocket expenses than original Medicare with Medigap insurance.

The Journal analysis found that in the last year of life beneficiaries switched from Advantage plans to original Medicare at about twice the rate of other beneficiaries.

People make the switch at that time to obtain nursing home or rehabilitation care at little or no cost to them.

The Journal article said the typical case is an elderly person who’s had a long hospital stay. The doctors recommend a move to a nursing home or skilled rehabilitation facility. But the Medicare Advantage plan denies the additional care or will permit it for a limited time. If the beneficiary wants the care, he has to pay for it.

After the beneficiary switches to original Medicare, the doctor-recommended care is approved and covered. It’s covered because Part A of Medicare covers most hospital care and subsequent nursing home care or rehabilitation without deductibles or coinsurance from the beneficiary. Unlike under an Advantage plan, the care doesn’t have to be pre-approved.

A move from Medicare Advantage to original Medicare won’t work for many other beneficiaries who aren’t in need of hospital or skilled nursing care.

They’re more likely to need non-hospital medical care covered by Part B, not Part A.

Part B care has limits, deductibles and coinsurance. The biggest gap in Medicare Part B is the 20% coinsurance for most medical care and services. An original Medicare beneficiary needs the Medicare supplement, or Medigap, insurance policy to pay all or most of the Part B gaps.

When first enrolling in Medicare, a beneficiary is guaranteed to be able to buy a Medigap policy regardless of health history.

But after a person’s seven-month initial enrollment period ends, the ability to buy a Medigap policy no longer is guaranteed. Insurers can deny coverage or charge high premiums.

That’s why so many of the people who move from an Advantage plan to original Medicare do so in the last year of life when most of their medical care will be covered by Part A. They don’t need Medigap policies.

In addition, most people can switch between Medicare Advantage and original Medicare only at certain times during the year, and the change isn’t effective immediately. Only care after the switch becomes effective is covered. Most people can’t time the switch with an increase in their need for medical care.

Spending, Other Factors Change for Many Retirees

Spending patterns and other aspects of retirement finances have changed in recent years, according to the third Retirement Spending in study from the Employee Benefits Research Institute (EBRI). Previous studies were done in 2020 and 2022.

A key finding of the study (taken during the summer of 2024) was that 58% of respondents retired earlier than they expected. About 38% of them retired earlier because of disabilities or other health problems.

Another 23% left their jobs involuntarily because of actions such as downsizing, closures, or reorganizations. About 21% said they retired early because they could afford to do so.

Only 4% retired later than they had expected.

Credit card debt increased substantially in the last two years. About 43% of retirees had outstanding credit card debt in 2020 and 40% in 2022. But in 2024, 68% of retirees said they had outstanding credit card debt.

Other debts also increased. In 2024, 38% of retirees had mortgages compared to 30% in 2022. Outstanding medical debt was reported by 19% of retirees in 2024, up from 11% in both 2022 and 2020.

There has been a steady increase in the percentage of retirees who said their spending was too high. In 2020, only 17% said their spending was much higher or a little higher than they could afford. The percentage rose to 27% in 2022 and 31% in 2024.

Two factors probably were the primary causes of these negative changes in retiree finances.

One likely cause was the big losses in stock and bond markets in 2022. Stock markets have more than recovered those losses, but it took a while. Bonds still are struggling.

The other likely cause was the high inflation of the period. Retirees’ finances couldn’t handle the sudden surge in many prices and the continuation of the higher price levels.

Only 7% of retirees said they spend more than $6,000 per month. A plurality of 34% said they spend between $2,000 and $3,999 per month.

But few retirees said they have a spending plan, and the percentage declined to 37% in 2024 from 39% in 2022 and 45% in 2020. As I’ve said in the past, the lack of a spending plan is one of the biggest gaps in most retirement plans.

Only 33% of retirees said they saved the right amount for retirement while 17% said they saved more than they needed. Half of retirees said they hadn’t saved enough.

Given that, it’s not surprising that 48% said they planned to spend down none or a small portion of their assets during retirement while 38% said they planned to spend all or a significant portion of their assets during retirement.

Don’t Overlook State Inheritance and Estate Taxes

It looks like most people won’t have to worry about federal estate and gift taxes for a while, thanks to the recent election results. But estate and inheritance taxes imposed by the states still matter to many people.

Estate taxes are imposed by 12 states and the District of Columbia, according to the Tax Foundation. Six states have inheritance taxes, though Iowa is phasing it out. Maryland has both an estate tax and an inheritance tax.

An estate must pay estate taxes before distributing the rest of the estate to beneficiaries. Inheritance taxes are an obligation of each beneficiary and are a percentage of the value of the inheritance.

The highest estate tax rate is 20%, imposed by Hawaii and Washington. Eight jurisdictions have 16% as their top estate tax rate. Connecticut has the only flat rate, 12%, and it’s imposed only on estates exceeding $13.61 million.

Estate tax exemption amounts vary from the high level in Connecticut to the low of $1 million in Oregon.

The lowest inheritance tax rate is 2%, imposed by Iowa. The top inheritance tax rate is 16%, imposed by Kentucky and New Jersey. Most states with inheritance taxes have lower tax rates and higher exemption amounts for the deceased’s immediate family members than for other beneficiaries.

Kentucky is the southern-most state with either of these taxes.

Some of the states with the taxes made or discussed changes during their 2024 legislative sessions. Maine and New York each increased their exemption amounts by less than $400,000 to $6.94 million in New York and $6.8 million in Maine. Attempts to repeal or significantly reform estate taxes failed in Hawaii and Illinois.

The Data

The Empire State Manufacturing Index jumped to positive 31.2 in November from negative 11.9 in October. That’s the index’s second positive level in the last 12 months and the highest since December 2021.

Industrial production declined 0.3% in October after falling 0.5% in September. Production in October was 0.3% lower than 12 months earlier. In September, it was down 0.7% over 12 months.

Manufacturing production fell 0.5% in October and 0.3% in September. Manufacturing production was 0.3% lower in October than 12 months earlier. In September, manufacturing production had fallen 0.6% from 12 months earlier.

Retail sales were 0.4% higher in October, following a 0.8% rise in September. Excluding gas and autos, retail sales were up 0.1% in October after rising 1.2% in September.

The Housing Market Index from the National Association of Home Builders (NAHB) was 46 in November, the highest level in seven months, up from 43 in October.

Housing starts fell 3.1% in October and 1.9% in September.

The Producer Price Index (PPI) increased 0.2% in October after rising 0.1% in September. Over 12 months, the PPI rose 2.4% through October and 1.9% through September.

The super-core PPI, which excludes prices of food, energy and trade services, was up 0.3% in October and 0.1% in September. Over 12 months, the super-core PPI rose 3.5% through October and 3.3% through September.

New unemployment claims fell by 4,000 to 217,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.873 million from 1.884 million.

The Markets

The S&P 500 lost 1.11% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 1.43%. The Russell 2000 dropped 2.88%. The All-Country World Index (excluding U.S. stocks) declined 0.13%. Emerging market equities retreated 0.14%.

Long-term treasuries rose 0.04% for the week. Investment-grade bonds increased 0.04%. Treasury Inflation-Protected Securities (TIPS) added 0.22%. High-yield bonds gained 0.14%.

On the currency front, the U.S. dollar advanced 0.34%.

Energy-based commodities increased 1.78%. Broader-based commodities rose 1.48%. Gold gained 1.34%.

Bob’s News & Updates

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I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.