By: David K. Carboni, Ph.D.,CFPⓇ
Medicare, the government health care program for those 65 and over (and disabled persons who have been collecting Social Security for at least two), has a number of features that are important to understand as you plan for your retirement health care needs. A recent study by Fidelity Investments indicates that a 65 year old couple retiring in 2009 without employer provided health insurance would need approximately $240,000 at retirement to pay for their health care costs during retirement. The Employee Benefit Research Institute’s research on the same topic concludes that the Fidelity figure is probably a little low. These studies do not include the cost of long-term care. Rather, they include the premiums, deductibles and co-pays associated with Medicare, as well as the cost of insurance to “fill the gaps” Medicare coverage leaves. Therefore, today’s retirees must not only know how Medicare works, but must also recognize what options they have to supplement Medicare’s core benefits.
Original Medicare has two parts, Part A and Part B. In recent years, Medicare has added a Part C, known as Medicare Advantage (formerly called Medicare + Choice). Beginning in 2006, a Prescription Drug Benefit Program (Part D) also became available. The rest of this article will review each of these parts of Medicare.
Part A refers to “Hospital Insurance” which generally covers room charges and services associated with an inpatient hospitalization, including stays in acute care hospitals, psychiatric hospitals, and limited coverage for care in skilled nursing facilities. Part A also covers hospice care and limited amounts of home health care. In 2010, the Part A deductible is $1,100 for each hospitalization up to 60 days. Hospital stays exceeding 60 have co-insurance charges. Likewise, skilled nursing facility coverage levies co-insurance charges for days beyond the first 20 up to 100 days. Part A will not pay for private rooms, TV, telephone or private duty nurses, but never the less provides good coverage for acute hospital care, including coverage for medical tests, blood work, and drugs administered in the Hospital. There’s no premium for Part A, as you’ve paid for this coverage through payroll taxes during your working lifetime.
Part B (known as medical insurance) covers physician care whether received in the hospital, at the doctor’s office, or as an outpatient at a health care facility. Part B also pays for ambulance services, lab tests, physical therapy, and rehabilitations services as well as coverage for x-rays, medical services, and durable medical equipment. The 2010 annual deductible for Part B is $155. After the deductible is met, Part B pays for 80% of the “Medicare allowable” charges. Services not covered by Part B, include: annual physical exams (beyond the initial “welcome to Medicare” physical), eye glasses, routine podiatric care, hearing aides, dental care, homemaker services, and custodial care. In 2010, the monthly Premium for Part B remains at $110.50 per month per person. Married couples with Adjusted Gross Income over $170,000, and single beneficiaries with AGI over $85,000, pay higher Part B premiums.
The Part D prescription drug program (PDP) covers prescription drugs through Medicare authorized, private insurance plans that must meet minimum standards, and they’re available nation wide. Once the 2010 annual deductible of $310 is met, PDPs cover 75% of the cost of prescriptions up to $2,830. Then beneficiaries must pay for 100% of their prescriptions costs for the next $3,610 (called the “donut hole”) until their expenses reach $6,440 (A recently passed law will gradually fill the “donut hole”). Then Plan D covers 95% of prescriptions’ costs exceeding $6,440.
If you are collecting Social Security benefits and you’re under 65, upon reaching age 65 you will be automatically enrolled in Medicare Part A. Part B coverage is voluntary. However, unless you are covered under a group health plan (or have dependent coverage under your spouse’s group health plan), it’s important to enroll in Part B immediately. If you delay and want to sign up for coverage later, you must generally wait until the next annual enrollment period (between January and March of the following year), and your coverage will not begin until the following July. Furthermore, Medicare will charge you a permanently higher Part B premium for each month you were eligible to sign up, but didn’t. Likewise, Plan D Prescription drug plans charge a permanently higher premium for those who don’t sign up when they’re first eligible (and then want to enroll later).
Part C (Medicare Advantage Plans) works a little differently. Original Medicare allows beneficiaries to choose any physician who accepts Medicare, and it’s available anywhere in the country. Under Part C of Medicare, insurance companies contract with the federal government to offer Medicare benefits through their own insurance plans. These plans include: managed care plans (e.g., HMOs), preferred provider plans (PPOs), private fee-for-service plans (PFFS), and others. Generally, Part C Plans provide beneficiaries with all Medicare-covered services and some offer prescription drug coverage as well. Part C plans may restrict which doctors or health care facilities their participants may use, and plan benefits and cost-sharing arrangements may differ significantly from Original Medicare. Part C is available only to those who are in Medicare Part A and have enrolled in Part B. Also, participants must live in the plan’s service area. You become eligible to join a Part C plan when you first become eligible for Medicare (generally, at age 65). After your initial enrollment in a Plan C plan, you may change plans once a year during an “annual election period.” If special situations arise, (e.g., you move out of the plan’s service area, or the plan leaves Medicare), you’re also allowed to switch plans during the year.
If you join a Part C Medicare Advantage Plan, you are subject to the rights and restrictions of each plan. It’s important to understand that you have alternatives to joining a Medicare Advantage Plan to supplement Original Medicare’s coverage. Discussing these alternatives, along with comparing them to Medicare Advantage plans, will be the subject of another article.