Hi everyone! Welcome back to Melissa Making Cents!
I woke up this morning to 2 very different text alerts on my phone. The first text was from a niece, "Wahoo... I'm now old enough to drink!" The second was from an uncle, "Wahoo... I just qualified for Medicare". It stopped me in my tracks, and made me laugh at how different our priorities change as we age.
As you’re probably aware, healthcare costs comprise a significant part of a person’s financial situation. I have had a lot of conversations lately with clients about healthcare in retirement, and many of them have questions about the process of applying for Medicare. If you’ve never gone through the process or don’t know anyone who has, it can be daunting to sift through all the information, especially around cost. Some of the questions I hear are: what’s the difference between Part A and Part B? What does Medicare cover, and what does it cost? Should I get a supplemental policy?
You may have had some of these questions yourself. That’s what I’m here for! Over the next two weeks, I’m doing a two-part series on the basics of Medicare. Today’s blog post will provide an overview of Medicare, the type of healthcare coverage it offers, and what you can expect for your out-of-pocket costs.
Medicare is a health insurance option available to most adults after age 65.
Medicare is a federal health insurance program for adults over the age of 65, who are U.S. citizens or legal permanent residents of at least five years. The initial enrollment period to get Medicare starts 3 months before you turn 65 and ends 3 months after you turn 65. There are additional opportunities to sign up for Medicare through general enrollment periods and special enrollment periods, but these are likely to incur late penalties or higher costs.
In order to get Medicare during your initial enrollment period or any of the other enrollment periods, you will need to sign up online or call the Social Security Administration. However, if you are already receiving Social Security benefits before you reach age 65, you will be automatically enrolled in Medicare and receive a welcome packet confirming your coverage.
It is also possible to qualify for Medicare earlier than age 65 if you have a disability or have certain conditions like end-stage renal disease.
Medicare coverage varies depending on the plan
Contrary to what some people believe, there are actually a few different healthcare coverages that go into “Medicare.” Benefits differ according to each type of coverage, as outlined below.
Original Medicare (Part A and Part B)
“Original Medicare” is composed of two parts: Part A and Part B. Medicare Part A covers healthcare services such as hospital stays, nursing facilities, hospice, and home health care. Medicare Part B covers other healthcare services, including doctor visits, preventive screenings, vaccinations, lab tests, and medical equipment. If you have Original Medicare, you can visit any doctor or hospital that accepts Medicare and you do not need a primary care physician.
Medicare Part D: Prescription Drug Coverage
Notably, Original Medicare doesn’t include prescription drug coverage outside of those used during hospital treatment or a doctor’s visit. That’s why it can be a good idea to add a Medicare Prescription Drug Plan (Part D) to your Original Medicare coverage. However, if you don't sign up for a Part D when you're first eligible at age 65, you may be liable for a lifetime premium penalty. So it pays to understand your coverage options up front!
Medicare Part D is often referred to as the "Donut Hole" plan. This refers to the structure in which the plan covers your prescription drugs and the large coverage gap, or donut hole, in coverage that previously existed. The good news for retirees is that the Affordable Care Act of 2020 created regulations that entirely closed the gap.
So Who pays for what?
- Stage 1 - Deductible - You pay 100% of your annual deductible set by the plan - $0 to $435
- Stage 2 - Initial Coverage - You pay a copay or percentage for your medications and the plan covers the rest - $436 to $4,020
- Stage 3 - Coverage Gap - You pay 25% of the cost of medications - $4,021 to $6,350
- Stage 4 - Catastrophic Coverage - You pay the greater of 5% of the cost or $8.95 for brand-name medications, for the remainder of the year
It may not surprise you that drug coverage can get expensive. I've seen a person eat into the donut hole within the first two moths of being in the Part D plan. The medications you take will be a very important piece of evaluating your medical coverage in medicare. Shop around!
Medicare Advantage Supplemental Plans
If you want to bundle Part A, Part B, and Part D coverages, another option is to enroll in a Medicare Advantage plan. While original Medicare is offered through the federal government, Medicare Advantage is a health insurance plan that provides Medicare benefits through a private insurance company. Since Medicare Advantage plans are offered through the private sector, they can also cover expenses related to vision, hearing, and dental. However, these plans come with a tradeoff: you would need to use in-network providers, limiting your options for care. Policies may vary from state to state, and I like to recommend that you evaluate your Medicare Supplemental policy coverage regularly to ensure you are getting the best deal for you.
You can evaluate policies online, or there are specialists that are available to help you determine which policy is a good fit for you. One tip I found helpful is to have a list of current providers, and medications. This will help you determine if a plan will pay for the medical care you are receiving currently and help you ballpark your healthcare costs in retirement.
There are some healthcare services that Medicare does NOT cover
Even though Medicare provides access to many healthcare services, there are some healthcare services that it does not cover. These include acupuncture, nursing home care, dentures, and cosmetic procedures. Original Medicare does not cover vision care, dental care, or hearing aids, although some Medicare Advantage plans do.
The cost of Medicare depends on your coverage options and your income
So the real question is...how much do you have to pay for Medicare? Well, there are a lot of factors that influence your out-of-pocket cost. These costs include premiums (monthly costs for the policy), deductibles, and coinsurance.
If you’ve worked at least 10 years (40 quarters) and paid Medicare taxes, Medicare Part A does not require a monthly premium. If you paid Medicare taxes for less than 30 quarters, the Part A premium is $458. If you paid Medicare taxes for 30-39 quarters, the standard Part A premium drops to $252.
Medicare Part B and Medicare Part D always come with a monthly premium. For Part B, the standard premium is $144.60, and the cost of the monthly premium for Part D varies by plan since it is offered through a private insurer. However, for both Part B and Part D, higher-income earners may pay more for their premiums. If you make more than $87,000, the total cost of the premium is determined according to the Income Related Monthly Adjustment Amount (IRMAA). If you fall into this category, you can estimate your premium cost for 2020 based on the Part B IRMAA table and the Part D IRMAA table.
Deductibles and Coinsurance
Aside from the monthly premiums, you will have to cover deductibles and coinsurance out-of-pocket. For Part A, there’s a flat $1,408 deductible for each benefit period. In addition, the Part A coinsurance depends on when healthcare expenses are incurred during the benefit period (based on the coinsurance table on the Medicare website). For Medicare Part B, there is always a $198 deductible and a 20% coinsurance. And for Part D, the deductible, coinsurance, and copays vary by plan.
So what does that mean for your “bottom line”?
Unlike most private insurance plans, Original Medicare doesn’t have an annual out-of-pocket spending limit. That means even if you have an astronomical healthcare bill, you will still be on the hook for a portion of the costs. That’s why many people look for supplemental insurance policies or other ways to reduce their healthcare costs. I have had the unfortunate experience of helping a family create a plan to pay for healthcare costs that were mistakenly assumed to be covered by medicare and hospice.
Stay tuned for next week, when I’ll talk more about whether you’ll need a supplemental health policy, how to reduce your healthcare costs, how Medicare works if you also have private insurance, and what financial planning you may need to take into consideration if additional coverage is required.
Until next time...this is Melissa Making Cents!
Melissa Anne Cox CERTIFIED FINANCIAL PLANNER™ is also a College Planning and Student Loan Advisor in Dallas, Texas.