Healthcare planning is among the most vital aspects of a well-rounded retirement plan. With current retirees expecting to spend upwards of $295,000 in medical costs alone throughout retirement (excluding long-term care), understanding your health coverage becomes more important than ever to stretch your savings and promote a happy, healthy retirement lifestyle. 

Medicare is an essential component of that discussion.  The Centers for Medicare and Medicaid Services (CMS) estimates that 67.7 million people are currently enrolled in Medicare. Many more retirees will enroll in Medicare this season. With such a large percentage of the population utilizing this service, it’s imperative to know what it is and how it works. 

Like many government agencies, Medicare comes with its own set of rules and regulations, some of which can be confusing to participants. Our team wanted to bring you an article that supplies a comprehensive overview of Medicare: what it is, how it works, and ways to plan for it. 

Let’s get started. 

What is Medicare?

Medicare was first introduced in America back in 1945 but wasn’t signed into law until 1965 by President Lyndon B. Johnson. Initially imagined to offer medical coverage to retirees, it has adapted and reformed over the years to provide better coverage for retirees and more. In its first year, over 19 million Americans signed up for the program, and that number continues to grow today. 

Medicare is a federal healthcare program designed to offer insurance for those over 65. Some other groups qualify for Medicare if they don’t meet the age threshold like those with certain life-threatening conditions and those collecting Social Security disability benefits. 

Unlike workplace plans you are used to, Medicare is broken up into several pieces, each with its own unique function. Let’s take a closer look.

Original Medicare

Original Medicare consists of parts A and B. Part A provides hospital insurance, and Part B covers medical insurance. What does this mean? We will break each part down further and discuss both what is covered and the subsequent costs.

Breaking down Part A

Part A (hospital care) covers the following:

• Inpatient care
• Skilled nursing facility
• Hospice
• Limited home health care

With Part A, you will receive hospital care aligned with your needs and treatment plan. This includes a semi-private room, food, medication, nursing services, and anything else that is medically necessary to treat you. It’s important to know that unless a service is medically necessary, it likely won’t be covered. 

Most beneficiaries don’t pay a premium for Part A, as the cost is absorbed from the payroll taxes you have paid throughout your career. You won’t have to pay a premium if you have worked for at least 10 years. 

Though Part A doesn’t have a premium, it does carry a deductible. The 2020 inpatient deductible is $1,408 for the first 60 days, any longer than that will result in increased fees. 

• Day 61 to 90 in-hospital care, $352 per day co-insurance
• Lifetime reserve in-hospital care, $704 per day co-insurance
• Skilled nursing facility, $176 per day (day 21 to 100)

There are a lot of numbers to keep track of. The main point here is that Medicare can be costly, and it isn’t as comprehensive or complete as many initially believe it to be. It’s critical to understand your potential costs so you can better plan. 

Breaking down Part B

Part B (medical coverage) covers services, supplies, and equipment needed to treat your condition. Examples of coverage include:

• Preventative care (flu shot, etc.)
• Outpatient care
• Durable medical equipment (wheelchair, walker, etc.)
• Certain doctor’s services 
• Limited rehabilitation services (physical therapy)

One of the most important phrases to remember about Medicare is “medically necessary.” If something is medically necessary and falls under the scope of coverage, Medicare will likely cover it. 

Unlike Part A, Part B has a monthly premium, which can fluctuate depending on your income. Most people will pay the standard premium, which for 2020 is $144.60. Should your income exceed certain levels, you may have to pay an Income Related Monthly Adjusted Amount (IRMAA). 

In 2020, Part B also carries a $198 deductible. Once you reach that annual limit, you typically pay 20% of the Medicare-approved amount for further services. 

Limits in cost and coverage

New Medicare beneficiaries are often surprised by the cost and coverage limits under Original Medicare. It’s important to know where those holes are and how to fix them. There are a couple of options for you to consider. 

As you can see, Medicare can be expensive especially for those who require extended hospital stays. In general, after you have met your deductible (excluding co-pays and co-insurance), Medicare will cover 80% of pre-approved expenses, leaving you to pick up the additional 20%.

While most healthcare plans have annual out-of-pocket-maximums, Medicare doesn’t institute such limits. This technically means that your annual medical expenses have no ceiling, proving significant gaps in your coverage. 

Original Medicare also doesn’t cover a lot of services you may be used to, like:

• Vision
• Dental
• Hearing aids
• Foot care
• Acupuncture

To help supplement your coverage, there are a couple of products you can consider:

• Medicare Advantage Plan
• Medicare Supplement Plan

We will discuss each of these options more in-depth in the next article. But for now, you need to know that both plans are offered by private insurance companies to help cover the care and services that Original Medicare won’t cover. 

It’s also important to note that Original Medicare along with most advantage and supplement plans, doesn’t include prescription drug coverage. This means you will have to purchase a separate Part D plan. Enrolling in Part D is important because if you delay and decide you need it later, there is a permanent penalty added to your monthly premium. 

How do you enroll in Medicare?

For first-time beneficiaries, you can enroll during your initial enrollment period (IEP). Your IEP lasts for 7 months—three months before you turn 65, the month you turn 65, and three months after that date. If you don’t enroll within this time frame, you will have to wait until the next general enrollment period (January 1 to March 31) to apply. Unless you have proper coverage (workplace coverage, etc.), late enrollment could result in fees and penalties.

Should you already be collecting Social Security benefits (or collecting benefits from the Railroad Retirement Board), you will likely automatically be enrolled in Original Medicare. 

For those who delay their Social Security benefits, you must either apply for Medicare online or at your local Social Security office. Remember, if you have to manually apply for Medicare benefits, it should be done during your initial enrollment period.

Keep in mind that Medicare open enrollment is October 15th to December 7th and allows you to make any changes or updates to your current plan like changing Part D plans or updating an Advantage plan, for example.

Our team can help

We know the value that Medicare plays in your financial plan. It’s important for us that you feel confident and secure with not only your healthcare plan but also how to support that with your finances. 

If you have any questions, please reach out to our team today.