One of the topics at the forefront of retirees’ minds is healthcare. In the 1960s, the government started the national social insurance program called Medicare to help retirees subsidize healthcare expenses in retirement. It is well publicized that the cost of healthcare has been rapidly outpacing inflation over the last two decades, and navigating this complex system and understanding how each part of Medicare works has become more important than ever.

How is Medicare funded?

FICA taxes are simply a part of life in the United States. FICA taxes are paid directly from wages earned from an employer. These taxes have two elements: Social Security and Medicare taxes, which are paid by employees and employers in the United States. The total FICA taxes paid are 15.3%, split equally at 7.65% for the employer and employee. Of this, 7.65% of everyone pays FICA taxes, and 1.45% is the Medicare portion taken on all employee earnings. However, the Social Security portion of FICA is capped each year at certain earnings levels, while the 1.45% for Medicare has no wage base cap.

Original Medicare: Part A and Part B

Original Medicare, as it is often referred to, is administered through this tax system and the means by which a vast majority of people get their Medicare.  Most often, people become eligible for Medicare benefits by virtue of turning age 65. Medicare Part A covers medically necessary hospital care, skilled nursing facilities, home health, and hospice care. This Medicare is free (no premiums) if you and/or your spouse have worked and paid Social Security taxes for at least 40 calendar quarters. Under Part A, Medicare pays for hospital services for up to 90 days in each benefit period. A benefit period ends when a patient is out of the hospital for 60 consecutive days. In each benefit period, the covered hospital expenses are paid in full for 60 days with a deductible of $1,316 that must be met first. For days 61-90, the patient coinsurance is $329 per day. After this point, the patient can use up a lifetime reserve of 60 days before being asked to cover all costs. Additionally, Medicare Part A covers skilled nursing. Medicare covers the first 20 days of skilled nursing in full, while for days 21-100, the coinsurance is $164.50 per day. It is important to note that Medicare Part A does not cover custodial or long-term care expenses and should not be considered a substitute for long-term care insurance.

Medicare Part B can be thought of as Medical Insurance or “Doctor” insurance. This part covers most doctors’ services, preventative care, durable medical equipment, outpatient services, diagnostic tests, and X-rays. Unlike Medicare Part A, Medicare Part B has a basic monthly premium of $134, but this increases for couples whose income exceeds $170,000 ($85,000 for individual tax filers). These premiums are typically deducted from people’s Social Security retirement benefits. The Medicare Part B deductible is $183 per year for each insured, at which point Medicare then pays for 80% of services covered while the insured pays the remaining 20%. Certain items, such as cosmetic surgery, dental care, and vision or hearing, are not covered by Medicare Part B.

It should be noted that people who are enrolled in Part A are automatically enrolled in Part B unless they opt out. For individuals who are still working and on their group health plan, it may make sense to continue to be covered on the group health plan versus enrolling in Medicare Part B. Generally, there is a 10% Part B premium penalty for each full 12-month period that you were eligible but didn’t sign up for it. The exception to this penalty (after you reach age 65) would be if you are still covered under a credible employer’s health plan with 20 or more employees.

Medicare Supplement Plans

There are ten different Medicare Supplement (Medigap) plans available in most states, and these plans have standardized benefits across each plan letter. The three most common Medigap plan types are F, G, and N. The purpose of Medigap policies is to fill in voids in Original Medicare (A and B). This can include costs of an inpatient hospital stay that last longer than 60 days or doctor/physician care coinsurance costs after you have reached your Part B deductible. These Supplemental plans vary per letter based on the services and procedures they cover. More importantly, even though all these plans are standardized by coverage, they are definitely not created equal. Some insurance carriers offer teaser introductory rates to get people in their plan before hiking premiums in later years to a point that they may become unaffordable. When selecting a Medigap insurance provider, it is important to look at the health of the company and its history of premium increases. When people reach 65 or roll off of their employer plan, they have a 6-month Medigap open enrollment period in which they can choose a plan without going through underwriting. Individuals need to go through the underwriting process after the initial open enrollment period. This makes choosing a Supplemental plan with a sound insurance provider very important upfront so you don’t have to risk moving carriers later because of excessive premium hikes when you may have an existing condition that prevents you from passing underwriting.

Medicare Part D: The Drug Plan

Medicare Part D is prescription drug coverage and provides protection for people who have considerable drug costs. Everyone covered under Medicare is eligible for Part D coverage, regardless of income, health status, or current prescription expenses. This drug plan covers both brand-name and generic prescription drugs at participating pharmacies. Medicare Part D has a monthly premium which varies by which drug plan you choose and also has an annual deductible. Insureds pay the cost of the prescriptions or coinsurance for the different prescriptions they take. These costs vary widely depending on the drug plan chosen. It is important to understand which plans cover which medicines you may be prescribed to take. The most basic Part D drug plan costs about $18/month, and a large portion averages somewhere around $25-$30/month for the premiums. It is important to note that you may change your drug plan from year to year as your prescriptions change. There is open enrollment every year from mid-October to early December to potentially switch your Part D drug plan.

Medicare Part C: Medicare Advantage Plans

Medicare Part C is not a separate benefit. This is a section of the Medicare policy that allows private health insurance companies to provide Medicare benefits. These Medicare health plans are known as Medicare Advantage Plans. By law, Medicare Advantage Plans must offer the same benefits as Original Medicare, but they can do so with different rules, costs, and certain coverage restrictions. One added benefit of Advantage plans is that they provide benefits such as prescription drug coverage (i.e., Part D), dental, and vision. Dental and vision benefits are specifically excluded from Original Medicare. Another benefit is that some of these Medicare Advantage Plans offer coverage outside of the United States that goes above what Original Medicare would cover in these situations. However, Medicare Advantage Plans do have some glaring disadvantages that need to be considered. Because these plans are run by private insurance companies, the specifics of each plan depend on the insurance company. These plans may require higher out-of-pocket costs than Original Medicare, and premiums, benefits, and copayments may also change from year to year. These plans often require you to follow strict rules for coverage of certain services like getting referrals to see specialists. Another issue with these plans is some plans, like HMOs, have provider networks that are narrowly associated with the region of the US that you signed up in and can cause issues if you are looking for even routine care outside of your provider network. Medicare Advantage Plans often change frequently from year to year as private insurance companies pull their plans from a state you may be living in which would require you to seek a new Advantage plan.

Make Your Own Decision

We understand that sorting through Medicare can be very time-consuming and confusing. However, it is important to take the time to understand what is best for you and your particular situation. DO NOT rely on what your friends or family may “recommend” because it is very likely their health needs are entirely different. It is very common for spouses to actually be covered under different Medicare Supplement plans depending on health history and medical needs. We encourage clients to take the time to talk to a knowledgeable professional in this field who can help them navigate this alphabet soup and make long-term decisions that provide peace of mind in retirement. If you have any questions, please contact us.

IMPORTANT DISCLOSURE INFORMATION