Healthcare costs are often the biggest expenses for retirees, and proper healthcare coverage for this group is critical to a healthy and fulfilling post-career life. When you retire, you will need to understand all of your healthcare options, and Medicare is an essential part of that discussion.
Medicare is an important yet complex program designed to assist the healthcare needs for those 65 and older. As you may already know, Medicare is far from a straightforward system. As a government program, it will vary from your employer-based healthcare in terms of coverage variations and fees structure. Many new retirees assume Medicare will cover the same type of care as their previous provider, only to find major and costly coverage gaps.
These changes can be daunting for new and seasoned retirees alike. Here are some Medicare insights to give you a better understanding of the system, how it works, and the many ways it can impact your retirement health.
Medicare Overview
The first version of Medicare was created in 1965 and sought to alleviate the overwhelming problem of people over age 65 with little to no access to health care. This system has since evolved over the years to include different levels of care and service. Medicare is now a program for people over age 65 to receive health care via hospital visits, medical equipment, preventative care, prescription drugs, and more. Original Medicare has two main parts — Part A and Part B — each covering a different aspect of care.
Medicare Part A
Part A is designed to cover hospital expenses and includes coverage for all medically necessary procedures. The key phrase here is medically necessary, which means your medical needs must be confirmed or ordered by a physician. While Part A does cover hospital expenses, it usually doesn’t cover a private room, private nursing care, toiletries, or other entertainment expenses like TV and phone use. Part A covers skilled care but not custodial care. Meaning, you’ll have coverage for procedures to help you get better (like a knee replacement), but you won’t receive coverage for long-term care during recoveries (such as help with meals, bathing, and other daily activities).
Most beneficiaries won’t be responsible for paying a monthly premium for Part A, but they will be responsible for deductibles which have increased in 2020. When you are admitted to the hospital, you will be responsible for paying $1,408, which covers the first 60 days of Medicare-covered treatment. From 61-90 days, this number increases to $352 per day, and up to $704 per day for a limited number of days thereafter.
Medicare Part B
Part B is also known as medical insurance and covers medically necessary doctor’s office visits, medical supplies, flu shots, outpatient care, and equipment necessary for your condition and needs — for example, a wheelchair or walker. It also covers ambulance service, some preventative medicine, and rehabilitation services such as physical therapy (if ordered by a doctor as an integral part of your care and recovery). Important things that are not covered by Medicare Part B are health care when traveling outside the US, most dental care, most vision care, dentures, hearing aids, and massage therapy.
Now that you know what Part B covers, it’s important to understand what it costs. Each year the Centers for Medicare and Medicaid Services release the costs for Medicare Part A and B. For 2020, the standard Part B monthly premium increased to $144.60 and the annual deductible also increased from 2019 to $198. This is the standard pricing and prices do fluctuate depending on your income level. The higher your adjusted gross income, the more expensive your premium will be. For example, a married couple filing jointly with a combined income between $272,000-$326,000 can expect a jump to $231.40 for their monthly premium. See this chart for the full income adjusted list.
Medicare Part C — Advantage Plans
Medicare Part C, otherwise known as a Medicare Advantage Plan, is an enrollment election supplied through a private insurance company. Advantage Plans are usually HMO’s or PPO’s that bundle Part A, Part B and additional coverage under one umbrella. As you approach 65, if your current health insurance provider offers an Advantage Plan, the transition can be fairly seamless.
Most Advantage Plans offer similar benefits:
- Dental
- Vision
- Physicals
- Hearing
- Worldwide emergency healthcare coverage
- Chiropractic benefits
- Wellness programs
Some Advantage Plans cover prescription drugs (Part D), but not all do, so be aware if you need to obtain coverage elsewhere. Advantage Plans are usually subject to the same restrictions as traditional HMO’s and PPO’s, i.e limits on out-of-network doctors, prior authorization required to see specialists, etc.
Most Advantage Plans don’t require an additional monthly premium (if enrolled in an advantage program you will still pay your Part B premium), but they do have higher out-of-pocket maximums ranging from $4,000 to $7,000 for some plans. Should you need medical attention, this means you may be paying much more over time than needed. With a high spending threshold, your out-of-pocket expenses like copays and deductibles must be paid for every doctor’s visit, lab testing, emergency room visit, and more until that maximum is reached.
Advantage Plans have lower monthly premiums than Medicare + Medigap Plans (see below), but require higher payments when you need care. Be sure to understand the Advantage Plan coverage parameters you’re considering, along with your maximum spending threshold, to see if it makes sense for your own healthcare needs.
Medicare Part D
Medicare Part D involves one of the most complex, misunderstood, and vitally important aspects of the Medicare system: prescription drug coverage. Many Americans rely on daily prescription drugs with a hefty price tag.
In 2020, Part D has an annual deductible of $435, so any amount spent beyond that will be covered by insurance. But Part D is a much longer journey than one annual deductible. After you’ve met that deductible, you move into the next phase: initial coverage. In this stage, you and the insurance provider split drug costs (via copays or coinsurance) until you reach a combined total of $4,020.
Once that $4,020 limit is reached, you will experience a gap in your coverage commonly referred to as the “donut hole.” When Part D began in 2006, the donut hole marked a place where beneficiaries had to pay 100% of their prescription drug costs. That has since changed, and the consumer now pays 25% while the insurance provider covers the remaining 75% until a new total of $6,350 is reached. After you leave the donut hole (strange but true!), you reach the final phase of catastrophic coverage where prescriptions are most affordable. You remain in this stage for the rest of the calendar year, when it resets and starts again in January.
Beneficiaries must enroll in Part D separately from Original Medicare within 60 days of initial enrollment. If you don’t enroll in that time frame, Medicare issues a penalty. The penalty is 1% of the national average cost of Part D (which right now is $34 per month, making the penalty 34 cents). That may not seem like a lot, but it is 34 cents for every month you don’t enroll. If you wait 10 years to enroll, that is an extra $41 on your monthly plan which can add a lot to your medical spending.
How Enrollment Works
When you turn 65, you have a 7-month window to enroll in Medicare: three months before through three months after your birthday. So if you turn 65 in August, you can enroll in June and/or extend enrollment through November. During this time you can enroll in:
- Original Medicare (Part A + Part B)
- Prescription Drug Plan (Part D)
- Medicare Advantage Plan (Part C)
By delaying enrollment, you face permanent penalties like higher premiums so be sure and plan for which election makes sense for you.
It’s also possible to sign up for Original Medicare between January 1 and March 31 if you 1) Didn’t sign up when you were first able to, or 2) Aren’t eligible for a special enrollment period like changing plans or losing coverage.
Once you are enrolled in Medicare, you can make changes to your plan each year in the open enrollment period from October 15 through December 7. Aside from this time, no changes can be made to your Medicare elections. For example, if you don’t enroll in Part D during this time but need access to coverage in May, you would be responsible for 100% of your prescription expenses until the next enrollment cycle in October.
Creating a Strategy
As you can see, Medicare has many moving parts, each with their own coverage limits, due dates, and financial responsibilities. So how will you know if you’re getting the coverage you need? By clarifying your needs and understanding what each part will and will not cover, you can discover where gaps in your coverage lie.
Medicare Supplement Plans
This is where Medicare Supplement plans come in. Medicare Supplement Plans, or Medigap Plans, are designed to help cover gaps in coverage. Sound familiar? Like Medicare Advantage Plans, they address the major gaps in Medicare coverage, but are structured in a completely different way. There are 10 different Medigap Plans, A-N, ranging in monthly premium and service-levels offered. Check out this chart for a complete breakdown of each plan and what it covers.
Medigap Plans are also offered by private insurance companies but they are not HMO’s or PPO’s. The terms are standardized across the U.S. — you can visit any doctor who accepts Medicare, and prior approval is not needed for you to visit a specialist. Advantage plans vary drastically in what they cover and where you can receive care, but Supplement Plan N is the same whether you live in Los Angeles, Philadelphia, or South Dakota.
With a Medicare Supplement you’ll have a monthly premium in addition to what you pay for Part B, but a significantly lower out-of-pocket-maximum, which can help you budget more accurately for medical expenses. If you are considering enrolling in a Medigap Plan, bear in mind you will need to enroll in, and manage coverage with, each of these Plans separately:
- Original Medicare
- Prescription Drug Plan
- Medigap Plan
Prioritize Your Health
Healthcare is an essential part of wellness. For retirees, focusing on quality, affordable healthcare can promote a long, happy life. Medicare is a complex system requiring time investment, patience, and research to get right. The key is finding which plan and financial structure make the most sense for you.
Abacus knows the value of creating a financial plan for your healthcare in retirement. Schedule a time to talk with our team today, and let us help you make the right choice for you and your family.
