In the good old days of retirement planning it was customary to assume that retirement income needed to be approximately 75-80% of what you made while you were working.  In most cases your house would be paid for and the monthly budget would be substantially reduced.  But somewhere along the line the cost of health insurance exploded like a voracious Pac-Man gobbling up dollars intended to put the “gold” in your golden years.   Today the cost of purchasing your own health insurance during retirement may carry virtually the same price tag as the average monthly mortgage.

“But wait!” you say.  “There’s Medicare when I get to be 65.”  Well, you’re correct.  But we all know that Medicare is a government program and that means there are more costs and more moving parts than most people realize.

The information below is not exhaustive, but is intended as an overview of Medicare according to current rules and regulations.  More information can be found at www.medicare.gov or by calling Social Security.

 

What is Medicare?

Medicare is health insurance offered by the United States Federal government to people who are 65 or older.  (Medicare is also offered to persons under the age of 65 who have certain disabilities or medical conditions and who meet Medicare eligibility requirements for those conditions.)

Once you are eligible for Medicare there are certain deadlines for enrolling.  Missing the enrollment window(s) can cost you time and money, not to mention the headaches of red tape that you really don’t want to deal with.

There are three ways to apply for Medicare—online, by visiting your local Social Security office or you can call Social Security at 800-772-1213.

 

The Four Parts of Medicare

Medicare Part A:  (Hospital Insurance)

In general, Part A covers inpatient services at hospitals, skilled nursing facilities, nursing homes (as long as custodial care isn’t the only care you need), hospice and home health services.

Medicare Part B:  (Medical Insurance)

Coverage for doctors’ services, outpatient care and home health care as well as some preventative services to maintain your health and to keep certain illnesses from getting worse.  In specific Part B covers things like clinical research, ambulance services, durable medical equipment, certain mental health services, getting a second opinion before surgery and some limited outpatient prescription drugs.

Medicare Part C:  (Medicare Advantage Plans)

Health coverage provided by private insurance companies that are approved and under contract with Medicare (like an HMO or PPO).  Medicare Advantage Plans include Part A, Part B and often Part D, and may offer extra coverage such as vision, hearing, dental and/or health and wellness programs.  In Medicare Advantage plans you are always covered for emergency and urgently needed care.  Medicare Advantage plans are not required to cover Hospice care, however Hospice is always covered under Original Medicare (Part A) even if you are in a Medicare Advantage plan.  When you are in a Medicare Advantage plan you are still in Medicare.

Medicare Part D:  (Drug coverage)

Part D plans are operated by private insurance companies that are approved by and under contract with Medicare.  You must be enrolled in Medicare before you can apply for Part D coverage.

 

What Does Medicare Cost?

Part A

In 2013, if you purchase Part A coverage the cost can be as much as $441 each month.  However, Part A Medicare is premium-free for people who are 65 years old and:

  • Already get retirement benefits from Social Security or the Railroad Retirement Board
  • Are eligible to get Social Security or Railroad benefits but haven’t filed for them yet or
  • You or your spouse had Medicare-covered government employment

Deductibles.  In 2013 in-hospital stays carry the following deductibles:

  • Days 1-60:                   $1,184 deductible for each benefit period
  • Days 61-90:                 $296 per day coinsurance
  • Days 91 & beyond:     $592 coinsurance per each “lifetime reserve day” after day 90 for each benefit period (up to 60 days over your lifetime)

Confused yet?  Hang on!  This is just Part A.

Part B

There is a cost for Part B Medicare (Medical Insurance).  In 2013 you will pay:

  • $104.90/ month per person ($1,258.80/year)
  • $147/year per person for your Part B deductible

In addition, if your modified adjusted gross income exceeds certain limits you will be required to pay more. The chart below from www.medicare.gov outlines the limits for 2013.

If your yearly income in 2011 was You pay (in 2013)
File individual tax return File joint tax return
$85,000 or less $170,000 or less $104.90
above $85,000 up to $107,000 above $170,000 up to $214,000 $146.90
above $107,000 up to $160,000 above $214,000 up to $320,000 $209.80
above $160,000 up to $214,000 above $320,000 up to $428,000 $272.70
above $214,000 above $428,000 $335.70

Finally, beware of the late enrollment penalty.  If you don’t sign up for Part B when you’re first eligible, your monthly premium for Part B may go up 10% for each full 12-month period that you could have had Part B but didn’t sign up for it.  That penalty will last for as long as you have Medicare.

Part C

The cost of Part C Medicare coverage (Medicare Advantage Plans) is not as easily determined as Parts A and B.  Since Part C is provided by private insurance companies each plan provider, not Medicare, establishes the amount charged for premiums, deductibles and covered services.  Changes in the cost of Part C plans can only change once a year, on January 1.  Your out-of-pocket costs in a Medicare Advantage Plan depend on a laundry list of what ifs:

  • Whether the plan charges a monthly premium
  • Whether the plan pays any of your monthly Medicare Part B premium
  • Whether the plan has a yearly deductible or any additional deductibles
  • How much you pay for each visit or serviced (copayment or coinsurance).  For example, the play may charge a copayment of $10 every time you see a doctor.  These amounts can be different than those under Original Medicare.
  • The type of health care services you need and how often you get them
  • Whether you go to a doctor or supplier who accepts assignment of Medicare payments
  • Whether you follow the plan’s rules, like using network providers
  • Whether you need extra benefits and if the plan charges for it
  • The plan’s yearly limit on your out-of-pocket costs for all medical services
  • Whether you have Medicaid or get help from your state

Part D

Most Medicare Prescription Drug Plans charge a monthly fee that varies by plan and provider.  You pay this in addition to the Medicare part B premium.  If you belong to a Medicare Advantage Plan (Part C) that includes Medicare prescription drug coverage, the monthly premium you pay to the plan may include an amount for drug coverage.  As with Part B, if your modified adjusted gross income as reported on your IRS tax return from 2 years ago exceeds certain limits, you will be required to pay a higher premium for Part D drug coverage.  The chart below from www.medicare.gov shows an estimate of what those additional premiums are.

If your yearly income in 2010 was You pay
File individual tax return File joint tax return
$85,000 or less $170,000 or less Your plan premium
above $85,000 up to $107,000 above $170,000 up to $214,000 $11.60 + your plan premium
above $107,000 up to $160,000 above $214,000 up to $320,000 $29.90 + your plan premium
above $160,000 up to $214,000 above $320,000 up to $428,000 $48.10+ your plan premium
above $214,000 above $428,000 $66.40 + your plan premium

Annual deductible.  This is in addition to the Part D premium.  It is the amount you must pay each year for your prescriptions before your Medicare Prescription Drug Plan begins to pay its share of your covered drugs.  Deductibles vary between Medicare drug plans.  In 2013 no drug plan could have a deductible of more than $325.

Copayment or coinsurance.  This is the amount you pay for each of your prescriptions after you’ve met the deductible.  Some Medicare Prescription Drug Plans have different levels or “tiers” of copayments or coinsurance, with different cost for different types of drugs.

  • Coinsurance means you pay a percentage of the cost (for example, 25%).
  • Copayment is a set amount you pay (for example, $10) for all drugs on a tier.  You may pay a lower copayment for generic drugs than brand-name drugs.

Coverage Gap.  Certain plans may place limits on how much the plan will pay for drugs.  In 2012 once you and your plan spent $2,930 on covered drugs (the combined amount plus your deductible) a Part D recipient fell into the “donut hole.”  At that point you pay 50% of the cost of covered brand-name drugs and 86% of the cost of generic drugs.

Late Enrollment Penalty.  You may pay more for your Part D premium if, after your initial enrollment period is over, there is a period of 63 or more days in a row when you don’t have Part D or other creditable prescription drug coverage.  How much it costs you depends on how long you went without coverage.  The late enrollment penalty is calculated by multiplying 1% of the “national base beneficiary premium” ($31.17 in 2013) times the number of full, uncovered months you were eligible but didn’t join a Medicare Prescription Drug Plan and went without other creditable prescription drug coverage.  The final amount is rounded to the nearest $0.10 and added to your monthly premium.  The national base beneficiary premium may increase each year, so the penalty amount may also increase each year.

 

Medigap Insurance

Another issue that merits a brief discussion here is Medicare supplement insurance.  Medigap policies are not part of Medicare.  They are sold by private companies for the purpose of paying some of the health care costs that Original Medicare (Part A and Part B) doesn’t cover, like copayments, coinsurance and deductibles.

A Medigap policy is different from a Medicare Advantage Plan (Part C).  Medicare Advantage plans are ways to get Medicare benefits.  Medigap policies only supplement your Original Medicare benefits.

According to www.medicare.gov there are 8 things you need to know about Medigap policies:

  • You must have Medicare Part A and Part B.
  • If you have a Medicare Advantage Plan, you can apply for a Medigap policy, but make sure you can leave the Medicare Advantage Plan before your Medigap policy begins.
  • You pay the private insurance company a monthly premium for your Medigap policy in addition to the monthly Part B premium that you pay to Medicare.
  • A Medigap policy only covers one person.  If you and your spouse both want Medigap coverage you’ll each have to buy separate policies.
  • You can buy a Medigap policy from any insurance company that’ licensed in your state to sell Medigap.
  • Any standardized Medigap policy is guaranteed renewable even if you have health problems.  This means the insurance company can’t cancel your Medigap policy as long as you pay the premium.
  • Medigap policies sold after January 1, 2006 are not allowed to include prescription drug coverage.  If you want prescription drug coverage you can join a Medicare prescription Drug Plan (Part D).
  • It’s illegal for anyone to sell you a Medigap policy if you have a Medicare Medical Savings Account (MSA) Plan.

Finally, keep in mind that Medigap policies generally don’t cover long-term care, vision or dental care, hearing aids, eyeglasses or private-duty nursing.

 

There are many more intricate details about Medicare not covered in this synopsis.  That information is available to you by going online at www.medicare.gov or by calling your local Social Security office.

*Information for this report comes from www.medicare.gov, the Official U.S. Government website for Medicare, managed by the Centers for Medicare & Medicaid Services.  7500 Security Boulevard, Baltimore, MD  21244.