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Retiree Healthcare Expenses (Part 2: Understanding Medicare)

December 9, 2019 BY Mark Haser

This post is the second of a three-part series on retiree healthcare expenses.

Part 1: Drivers of Retiree Healthcare Expenses
Part 2: Understanding Medicare
Part 3: Factoring in Long-term Care

In Part 1 of this series, we looked at the impact of health status, income, insurance coverage, and location on a retiree’s healthcare expenses. In this post we are going to take a deeper dive into Medicare—how it works, what it does and doesn’t cover, and how much you should expect to pay.

Medicare is the federal health insurance program for people who are age 65 and older. It was signed into law in 1965 and has since been updated several times, most recently through the Affordable Care Act in 2010. With a few exceptions, most people should sign up for Medicare during the 7 month-window surrounding their 65th birthday month (3 months before and 3 months after).

What Medicare Covers

Medicare has three basic parts:

Part A covers inpatient hospital care. This may include services such as lab tests, x-rays, a semi-private room, hospital meals, skilled nursing services, and rehabilitation services. Part A has no premium associated with it, but it does have a deductible and there are limits on coverage. In 2019, there is a $1,364 deductible for the first 60 days in a hospital. Days 61-90 require a coinsurance payment of $341/day. After day 90, you are entitled to 60 lifetime reserve days with a $682/day coinsurance payment. Any hospital charges beyond this are not covered by Medicare, meaning after a maximum of 150 days, you could be responsible for the balance of all costs.

Part B covers outpatient care and any doctor services you receive as a hospital inpatient. This may include services such as wellness check-ups, preventive care (e.g., flu shot), diagnostic tests, emergency room services, and lab services (e.g., blood sample). Part B charges a monthly premium which is deducted from your monthly social security paycheck. If you are not receiving Social Security, you must send a monthly premium payment to Medicare. Part B premiums can range from $135.50 to $460.50 depending on your income (more about this below), but Part B’s deductible is only $185 for 2019. Once the deductible has been met, Medicare pays 80% and you pay a 20% coinsurance of the Medicare-approved charges. There is no cap on this amount.

Part D covers prescription drugs, but the coverage works a little bit differently than Parts A and B. With Part D, you select from a prescription drug plan that is provided by a private insurer approved by Medicare. There are about 900 plans in total, with each state having 20-30 plans. Medicare Part D recipients must select from a plan offered in their state of residence. The actual drug coverage varies from plan to plan, however all plans generally cover most common types of drugs. You need to review each plan’s drug list (aka “formulary”) to see if it covers your drugs. The formulary for each plan can change from year to year.

Medicare Advantage & Medigap

As you might have picked up on, Medicare coverage is not without its flaws, especially if you become seriously sick or injured. Ask yourself if you can afford to pay 20% of a $50,000 knee replacement or 20% of eight weeks of cancer chemotherapy. You could be left responsible for tens of thousands of dollars in deductibles, coinsurance payments, and non-covered charges. This is where Medigap and Medicare Advantage come into play.

Medigap is a supplemental plan you can add on to Medicare Parts A and B. Medigap covers things like deductibles, coinsurance and co-payments for Parts A and B, additional hospitalization coverage, skilled nursing facility coinsurance, and a foreign traveler emergency benefit of up to $50,000. Medigap plans are offered by private insurers (e.g., BlueCross) and vary by state, so you will need to research them before deciding on one.

The other option to help boost your coverage is a Medicare Advantage Plan, sometimes called “Medicare Part C.” These plans are offered by private companies approved by Medicare. Medicare Advantage bundles together Medicare Part A (Hospital Insurance) and Medicare Part B (Medical Insurance), and usually Medicare prescription drug (Part D). Medicare Advantage plans generally provide better coverage than regular Medicare and often lower premiums. The catch is that you are restricted to the providers within the plan’s network, which is typically confined to a small geographic region that you might find limiting depending on where you live.  

Expenses Not Covered by Medicare

You might be unpleasantly surprised to learn that Medicare does not cover eye exams, most dental care, orthodontia, dentures, hearing aids, acupuncture, cosmetic surgery, custodial care (aka non-skilled personal care), or long-term care in a nursing home. You should plan to save up and pay out of pocket for these types of health care services or purchase separate insurance for them.

Medicare is Means-Tested

As discussed in my last post, Medicare is “means-tested.” This means the wealthier you are, the more you will pay in monthly premiums for Parts B and D (recall that there is no premium for Part A). To determine your premium, Medicare looks at your modified adjusted gross income (MAGI), which is your adjusted gross income (AGI) plus any tax-exempt interest income. Medicare uses the MAGI on your IRS tax return from one or two years prior to the current year, so you if have a sudden increase or decrease in income, there will be a two-year lag in any change to your Medicare premiums (unless you petition for an exception based on a qualifying event).

Summing it all up

There’s a lot more to know about Medicare, but hopefully this gives you a starting point to understand how Medicare works and some of the decisions you face as a Medicare recipient. It is important to identify what Medicare does and doesn’t not cover, recognize the trade-offs between Medicare and Medicare Advantage, and understand how you can potentially protect yourself from skyrocketing costs with a Medigap plan. If you want help deciding between Medigap plans or selecting the right Medicare Part D plan, a good place to start is your state’s State Health Insurance Assistance Program (SHIP), which is a national program that provides free one-one-one advice to help people with Medicare-related questions.

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Mark Haser, M.B.A., is a financial planner at Artemis Advisors. His areas of interest include retirement and education planning, risk management, and cash flow management.