Navigating healthcare in retirement can often feel daunting, especially when it comes to your personal health and the health of your loved ones. Aging can bring a more poignant focus on the vulnerability we inevitably face when we require doctor’s visits or hospitalization. Add to that the seemingly endless policy choices, possibilities, and changes to the healthcare system, it can feel like trying to scale an enormous mountain without a map.
For those reaching their golden years (or facing certain medical conditions before retirement), navigating the path to finding and securing the best possible coverage isn’t just an option – it’s a necessity.
Whether you’re embarking on your own Medicare journey or seeking to expand your knowledge on behalf of a loved one in need, here is the preparation you’ll need to help climb the mountain of better Medicare understanding.
History and Evolution of Medicare
Before Medicare, adults often had inadequate protection against healthcare costs. These costs generally increase with age and are typically associated with decreased income. In 1963, shortly before Medicare was established, only about half of the older adult population in the U.S. had hospital insurance.
Additionally, private insurance companies could terminate health policies for individuals they deemed high risk – leaving ill and older adults even more vulnerable.
Medicare was enacted in 1965 to provide older adults in the United States with affordable health insurance. Initially, the program offered hospital and medical insurance but has evolved to include other benefits.
The program has undergone many changes over the years, including expanding eligibility to younger individuals with specific disabilities or diseases, providing supplemental insurance (Medigap), introducing Medicare-approved private health plans (Medicare Advantage), expanding coverage for prescription drugs, and expanding preventative services.
Currently, Medicare coverage is available to people aged 65 and older and younger individuals with specific disabilities or covered conditions.
Medicare Coverage Options
While there is a lot of information to digest about Medicare, breaking it down into smaller, bite-size pieces can help make for easier understanding. Essentially, Medicare coverage is divided into four parts, each covering different types of healthcare services you might need.
Medicare Part A: Hospital Insurance
You may qualify for Medicare Part A if you are over 65 or have a disability or specific medical condition. But, to receive Medicare Part A for free, you must meet the following criteria:
- You (or your spouse) have worked and paid Medicare taxes for at least ten years
- You receive (or are eligible for) Social Security or Railroad Retirement Board benefits
- You or your spouse are (or were) Medicare-covered government employees
Enrolling in Medicare Part A can be automatic or manual. The federal government will automatically enroll you if you meet the above mentioned criteria. If not, you must apply for Medicare Part A.
Typically, there are two time frames to enroll. You can enroll as early as three months before the month you turn 65, during your birth month, and up to three months after your 65th birthday. Following these guidelines is essential because if you don’t enroll during this period, you could face financial penalties like paying more for healthcare coverage or delaying when your Medicare benefits begin.
Note that you can also sign up during the general enrollment period that runs from January 1st to March 31st, but you may also face penalty fees with this route.
Services under Medicare Part A coverage consist of:
- Inpatient Hospital Care – This includes tests or treatments you need when you’ve been admitted (including mental health or rehabilitation inpatient services).
- Hospice Care – If you seek hospice care instead of treatment for a terminal illness.
- Limited Home Healthcare – If you require care from a home health aid after a hospital stay (please note this is not considered long-term care).
- Short-term Nursing Facility Stays – If you require care from a skilled nursing facility (please note this is not considered long-term care).
It’s important to note here that Medicare Part A does not cover all hospital costs. Here are just a few items examples of what’s not covered:
- Private rooms
- Long-term care
- Your first three pints of blood (if the hospital has to get special blood for you rather than from a blood bank).
So, how much does it cost if you don’t meet the criteria for free Part A coverage?
The monthly premium depends on how long you’ve paid Medicare taxes. For example, in 2022, if you’ve worked less than 30 quarters (and paid less than 30 quarters in taxes), the monthly premium is $499. If you worked between 30 to 39 quarters (and paid between 30 to 39 quarters in taxes), the monthly premium is $274.
If you don’t get premium-free Part A coverage, you can pay up to $506 monthly.
In addition to the monthly premium, Medicare Part A has a deductible before coverage. In 2023, the deductible is $1,600 for each benefit period. (The period begins when you’re admitted to a facility and ends when you’ve not received care for 60 days.)
Depending on how long you receive inpatient care, you may also have to pay additional coinsurance costs:
- Days 1 to 60: $0 per day
- Days 61 to 90: $400 per day
- Days 91 and beyond: $800 per day
If you require additional care from a skilled nursing facility, you could pay $0 for the first 20 days of each benefit period, $200 per day for days 21 to 100, and all costs beyond 100 days.
Medicare Part B: Medical Insurance
Most U.S. citizens aged 65 and older are eligible for Medicare Part B. Other qualifications can include specific disabilities or medical conditions. The enrollment period begins three months before you turn 65, includes your birthday month, and ends three months later. If you don’t sign up within that period, you can still sign up during General Enrollment which runs annually from January 1st through March 31.
Medicare Part B (or “Medical Insurance”) covers a range of outpatient services and medical supplies, including:
- Doctor Visits (including specialists and other providers)
- Preventative Services
- Outpatient Care (for example, anything that doesn’t require an overnight hospital stay like diagnostic tests or lab work)
- Ambulance Services
- Durable Medical Equipment (wheelchairs, walkers, etc.)
- Outpatient Mental Health Services
- Limited Prescription Drugs (such as those administered through injections or infusion)
There are, of course, some things not covered by Part B. Most will not be surprising and include monthly premiums, deductibles, co-insurance, excess charges beyond the Medicare-approved amount, prescription drugs (most are covered under Part D), and coverage gaps like dental care, vision care, and long-term care.
Medicare Part B costs can vary based on your income. Still, most people pay the standard monthly premium. In 2023, the standard monthly premium for Part B is $164.90.
Medicare Part C: Medicare Advantage
Medicare Part C – or Medicare Advantage – is where things often become more confusing. To simplify, Medicare Advantage (Part C) is an alternative way to receive your Medicare benefits. It combines Part A and Part B (Original Medicare) coverage into a single plan. These combined plans are typically provided by private insurance companies.
The eligibility requirements for Part C are specific: you must be enrolled in both Medicare Part A and B and live within the service area of the Part C plan you wish to join. Enrollment is just like Part A and B, with an initial seven month enrollment period (i.e. beginning three months before you turn 65 and ending three months after your birthday month), an annual enrollment period (October 15th through December 7th), Medicare Advantage Open Enrollment (January 1st through March 31st annually), or Special Enrollment Periods triggered by certain life events such as moving to a new area, losing other coverage, or qualifying for help with benefit costs.
Looking at the coverage details of Part C, Advantage plans are required to offer the same benefits as Part A and B (Original Medicare) but often have additional benefits, including:
- Prescription Drug Coverage (eliminates the need for a separate drug plan (Part D))
- Dental, Vision, Hearing, Fitness Programming, and Preventative Services
- Out-of-Pocket-Maximum (once the limit is reached, the plan pays all costs for covered services for the rest of the coverage period)
However, there are limitations to Medicare Advantage plans, including network restrictions. This could mean you have limited provider choices in comparison to Original Medicare. In addition, Part C plans can change their coverage networks and costs from year to year, can require referrals to see specialists (which can delay care), and require residency within a specific service area. Costs also vary widely between the different Medicare Advantage plans (premiums, copayments, and deductibles).
Because Medicare Advantage plans are offered through private insurance companies and are limited to specific service areas, there’s no easy way to determine what your monthly costs could look like. To give you an idea, states like Maine, South Carolina, New Mexico, Idaho, Missouri, and Nevada have the lowest average monthly premiums for Medicare Advantage plans in 2023 at $42 or less. North Dakota has the highest average premium in 2023 at $116.94.
To explore coverage options, you can visit Medicare.gov or MedicareAdvantage.com.
Deciding between Original Medicare and Medicare Advantage depends on your health needs, budget, preferred doctors, and the specific plans in your area. Before jumping into a Medicare Advantage plan, carefully read through plan details like costs, network restrictions, coverage limitations, and benefits before choosing. You can also consider working directly with a Medicare counselor or insurance agent for personalized guidance.
Medicare Part D: Prescription Drug Coverage
Individuals who require or rely on prescription drugs for chronic medical conditions are acutely aware of their often significant financial burden. This is where Medicare Part D enters the picture.
Medicare Part D was introduced as a direct solution to high prescription drug costs for older adults without insurance coverage. The enrollment periods include the Initial Enrollment Period, Annual Enrollment Period, and Special Enrollment Period.
Like Part C, Part D plans are offered by private insurance companies approved by Medicare. Because of this, coverage specifics can vary between plans, but most include:
- Drug Formulary – This means different drugs are placed in different cost tiers
- Cost Sharing – You pay a portion of drug costs that includes copayments or coinsurance, deductibles, and a percentage of the drug’s cost itself
- Catastrophic Coverage – Once you’ve spent a certain amount on covered drugs in a calendar year, you reach a catastrophic coverage phase where costs are significantly reduced
Like all Medicare plans, Part D has limitations, including formulary and network restrictions. Formulary restrictions can be detrimental if you require specific medication, so be sure it’s covered by the plan you’re considering. Network restrictions can have preferred pharmacies where you can receive better cost-sharing, and specific plans might not cover pharmacies that are out of network.
Your monthly Part D premium is based on your income, but there is a national base beneficiary premium of $32.74.
We’ve alluded to the fact that all Medicare plans rely on your income to determine monthly premiums. Here’s a closer look at Medicare costs, their determining factors, and other influences on out-of-pocket costs.
Understanding Medicare Costs
Signing up for Medicare during your Initial Enrollment Period is essential, otherwise you might be responsible for paying late penalty fees. These penalties are added to your monthly premium (meaning they’re not a one-time fee) and increase the longer you wait to sign-up.
Part A Late Enrollment Penalty:
If you have to buy Medicare Part A and don’t sign up when you’re first eligible, your monthly premium can go up 10%. You will be required to pay this penalty for twice the number of years you didn’t sign up. For example, if you were eligible for Part A for three years but didn’t sign up, you must pay the higher premium amount for six years.
Part B Late Enrollment Penalty:
If you don’t sign up for Part B during your Initial Enrollment period (unless you qualify for a Special Enrollment Period), you’ll be required to pay an extra 10% for each year you could have signed up for Part B but didn’t. For example, if you wait four years (48 months) to sign up for Part B, you’ll be required to pay a 40% enrollment penalty (10% for every 12 months missed), plus the standard Part B monthly premium. This would make your monthly premium $230.86 (i.e. the Standard Premium amount of $164.90 plus the Late Enrollment Penalty of $65.96).
Part D Late Enrollment Penalty:
You must pay 1% for each month you don’t join a Medicare Drug plan when you first get Medicare or go 63 days or more without creditable drug coverage. Medicare.gov provides an example of an individual that waited 14 months after they were eligible to enroll in a Medicare Drug plan. This means they are required to pay a 14% enrollment penalty in addition to the monthly premium. In 2023, the national base beneficiary premium is $32.74, meaning the monthly cost plus the penalty will be $37.32.
Another influence on higher Medicare premiums is the Income-Related Monthly Adjustment Amount (IRMAA). This is an additional premium that some Medicare beneficiaries must pay for Medicare Part B and Part D coverage. IRMAA applies to higher-income individuals and is designed to help fund some Medicare costs.
The Social Security Administration uses your reported income from two years prior to determine whether or not you’ll be required to pay IRMAA for the current year. If you’re enrolling in Medicare in 2023, your 2021 tax return will be used to determine your premium for the year.
Medicare provides the following charts to help high net worth individuals determine if they’re subject to IRMAA.
Part B
Part D
Supplemental Insurance Policies
Medigap or Medicare Supplement Insurance is private health insurance that does precisely what its name says: it fills the gaps in coverage left by Medicare Part A and Part B, and covers out-of-pocket costs like deductibles, copayments, and coinsurance.
Medigap benefits:
- Lets you see any healthcare provider that accepts Medicare patients
- Can offer coverage for emergency medical care if you’re traveling outside of the U.S.
- Are guaranteed renewable, meaning the policy can’t be canceled due to health conditions
But there’s a catch, Medigap doesn’t cover everything. Policies are designed to work alongside Medicare, meaning they still don’t cover services that aren’t included in Medicare coverage, such as dental, vision, hearing, and long-term care.
In addition, each plan provides different coverage levels and has varying premiums, so you’ll need to choose one that aligns with your budget and healthcare needs. And Medigap isn’t compatible with Medicare Advantage Plans (Part C), so you’ll have to weigh your options when determining the best course of action for you, your finances, and your healthcare needs.
Another type of Medicare supplement is Medicaid. It’s a program that provides healthcare coverage to low-income individuals and families, and is designed to ensure that people who have limited resources can access necessary medical services.
Medicaid provides:
- Coverage for Various Groups – This includes pregnant women, elderly adults, disabled individuals, and low-income adults
- Mandatory and Optional Benefits – Required benefits are inpatient and outpatient hospital services, laboratory and x-ray services, and other physician services; optional benefits include prescription drugs, dental and vision care, and long-term care services
Medicaid is different from Medicare because individual states administer it. This means that the federal government sets some basic guidelines, but states have the flexibility to design their own Medicaid programs to meet the specific needs of their citizens. If you think you might be eligible, visit your state’s Medicaid agency or website to learn more and apply.
The Future of Medicare
The Medicare program is a critical component of providing healthcare coverage to older adults and certain individuals with disabilities. That said, it is not immune to challenges that can impact its sustainability.
Rising healthcare costs continue to place pressure on Medicare’s budget. Medical services, prescription drugs, and healthcare advancements are all expensive, and increasing costs reflect that. In addition, as the baby boomer generation ages, the number of Medicare beneficiaries is rising rapidly, putting additional strain on the program’s finances.
Perhaps the most important issue to be aware of is ensuring the quality of care that Medicare users receive. This includes addressing disparities in healthcare access and outcomes across different demographic groups.
To ensure the sustainability of Medicare for future generations, policymakers must continue to work toward improving the program.
Have Questions?
Medicare plays a critical role in your retirement and health care planning as you continue to move towards (and through) your next chapter. Working with a financial advisor, and possibly even a Medicare specialist, can help you determine what level of coverage is right for you and what costs you can anticipate moving forward.
But Medicare planning is not just about understanding the costs – it’s also about having a sense of peace around the future. If you have more questions about your future, or if you’re curious how to build a long-term retirement plan that is aligned with your values, reach out to an Abacus advisor and schedule a call today.
