START BY BEING THANKFUL.
In July 1965, Lyndon Johnson signed Medicare into existence. Of course, fifty-five years has a way of erasing memories. We forget that before the law, 40% of U.S. seniors had no health insurance and no way to get it. In the beginning, the program paid only for in-patient hospital care. Over the years, Medicare expanded to cover out-of-hospital services and prescription drugs.
Medicare had an immediate impact beyond access to hospital rooms for seniors. Johnson made sure that the bill limited Medicare funds to integrated facilities. As a result of the funding restriction, America integrated hospitals before almost any other public facilities.
Before Medicare, millions of uninsured Americans prone to illness gobbled up a huge percentage of charity health care. Medicare largely replaced the charity-funded care, freeing charities to focus on research and care for other vulnerable populations.
In all, Medicare has been wildly successful. The availability of medical care is a key component for a successful retirement. Before Medicare, that key component was either doubtful or unavailable for a large group of retirees. Today the same retirees enjoy access to the best health care in the world.
A PLAN WITH MANY PARTS.
Medicare coverage can be confusing. Different sections of the Medicare statute cover different services; the industry refers to each section as a “part.” Thus, we have Medicare Parts A, B, C and D. Part C describes privately administered plan that provide benefits roughly equivalent to benefits available under Parts A, B and D. In other words, you choose Parts A, B and D government coverage or Part C private coverage, often an HMO.
Part A covers hospital and skilled nursing services, Part B covers a portion of out-of-hospital expenses, and Part D covers prescription drug expenses not covered by Part B. Note that Part B only covers a portion of the out-of-hospital expenses, creating a “gap” between a retiree’s medical insurance benefits and his or her actual medical expenses. Many retirees take out private “Medi-Gap” insurance policies that cover the difference. As noted, some retirees choose a Part C plan instead of coverage under Parts A, B and D.
Just as important is recognizing what Medicare does not cover-room and food charges at nursing homes and assisted living centers. Remember that Medicare is about medical expenses, not rent or food. You pay for room and food charges with personal savings, long-term care insurance or Medicaid.
NO SUCH THING AS A FREE LUNCH.
The key to planning for retirement health spending is that Medicare does not cover all your potential medical expenses. Just as with private insurance for non-retirees, for coverage to kick in, the service must be medically necessary. Deductibles, co-pays and spending limits apply even after the administrator deems services medically necessary.
Likewise, the government or private administrators require premium payments for coverage under Parts B, C and D. The vast majority of retirees do not owe premiums on Part A because enough work credits gains you coverage. If for some reason, neither you nor your spouse worked enough to qualify, you pay premiums on Part A also.
STARTING MEDICARE.
The first issue to wrangle with is the difference between Social Security and Medicare. You can declare yourself eligible for Social Security at age 62, no similar option exists for Medicare. Starting Social Security early might be fine if you keep working with employer coverage or your spouse provides medical benefits. If you do not fall into either category, “retiring early” means finding private insurance between ages 62-65.
For the most part, workers become eligible for Medicare at age 65. Disability or suffering from certain highly specific diseases might also gain qualification, but this article focuses on retirement benefits. On the other hand, if you did not work long enough while paying Medicare taxes, you may not be eligible. Thus, step one is to confirm through the Social Security Office that you will be Medicare eligible at age 65.
TO B OR NOT TO B?
Assuming you are Medicare eligible at age 65, Part A is the only mandatory coverage. If you have coverage from another source it may seem like an easy choice to elect only Part A coverage. You likely will not owe premiums for Part A, so that is free duplicate coverage for hospital costs. Your current plan can handle out-of-pocket and prescription expenses. Unfortunately, the law imposes a 10% lifetime penalty on Medicare recipients who do not enroll in Part B when first eligible.
The penalty rule presents a tricky decision. On a Part B $200.00 monthly premium, waiting to enroll saves that amount monthly until enrollment. It then costs you $20.00 monthly after enrollment. If you work a short time past age 65, enrolling in Part B when first eligible makes sense even though you will be paying for a benefit you will not use.
THE FULLY LOADED PRICE.
The Medicare premium amounts quoted to you by the administrator do not tell the whole story. First, you must decide whether you prefer government coverage under Parts A, B and D or private coverage through Part C. Next, you need to identify the exposure you face for deductibles, co-pays and limited or uncovered services. Finally, you need a plan for handling that risk.
Payments for uncovered medical expenses come from one of three sources. You may have free cash set aside. Alternatively, you may use a Health Savings Account to build a tax-favored hedge against medical expenses. Most people, however, take out a separate, private “medi-gap” insurance policy designed to defray most, if not all, uncovered expenses.
FINALLY, AS IF YOU DID NOT HAVE ENOUGH WORRY.
Medicare receives funds from four sources: (1) employment taxes paid by current workers; (2) trust fund interest on funds that have built up over the years when costs were less than payroll tax contributions; (3) insurance premiums paid by current seniors; and (4) general treasury funds. That structure makes Medicare funding more susceptible to economic and demographic changes than the Social Security benefits we discussed earlier. In case you missed it, we are in the midst of some severe economic issues.
As baby boomers retired, the work force was shrinking and Medicare needs growing already. The rise in unemployment and Medicare expenses related to the pandemic increased Medicare’s deficit. Current estimates are that the Medicare trust fund will run dry as early as 2024.
Practically speaking, Congress cannot reduce Social security benefits to save the solvency of that system; the kickback would be overwhelming. Unlike Social Security, Congress can reduce the Medicare money going out by reducing the reimbursement rate and the services covered. It took those steps in 2010, the last time Medicare faced a solvency crisis.
In summary, we can expect the quality and quantity of Medicare services to decline. The only “outs” from this predicament are increased payroll taxes, greater contributions from general funds or more borrowing.
KISS (KEEP IT SIMPLE SWEETHEART).
Keeping Medicare simple may be an impossible dream. Luckily, many elder care specialists take the time to know the rules and strategies behind your important decisions. The biggest tip we can offer is to find a knowledgeable expert at least a year before you turn 65. The first thing the expert will help you with is determining when you need to enroll. For current recipients, a good counselor will evaluate and adjust your plan when appropriate, usually between October 15 and December 7.
You do not have to remember all the ins and outs, but here is a basic Medicare checklist for Medicare in retirement:
- Make sure your work credits make you Medicare eligible by calling the Social Security office
- If you retire before age 65, arrange for private coverage; none will be available through Medicare
- Plan for assisted living or nursing home separately, Medicare does not cover those expenses
- Identify how you will pay for uncovered costs, understanding that Medicare is under financial stress that may increase those costs
- Make a conscious decision about when to enroll in Part B if you work past age 65
- Find a good adviser at least a year before your 65th birthday
- Consult your adviser before October of every year after you turn 65.
