There will be many Medicare options in retirement you'll be tasked to choose from, and Medicare is a daunting program to understand for most retirees. In this episode we break down the different components and additional coverage options in layman’s terms. Having a good understanding of the different options and various costs components can provide you with more confidence in your healthcare plan during retirement.
More specifically, I discuss:
- What is Medicare, and what are the main components?
- What does Medicare pay for?
- What types of additional coverage are available? What are the costs?
- The difference between Medicare Advantage Plans (Part C) and Medicare Supplement Plans (Medigap), and some of the pros and cons of each.
- What factors should you consider when making coverage decisions?
Resources From This Episode:
Medicare Options in Retirement
Happy New Year's, everyone! I hope you have had a wonderful and fulfilling holiday season surrounded by family and friends. Because, at the end of the day, that's what life is all about.
Welcome to the Retired-ish podcast. As always, I'm your host, Cameron Valadez, and today we are shifting our focus away from investments and retirement income strategies and the like, and we are now going to laser in on one of the most important retirement planning topics in my opinion, which is your healthcare in retirement. More specifically, I'm talking about Medicare, what it is, how it works, and how to sift through all of the alphabet soup that comes with it.
If you've been confused by Medicare, you're not alone. It's a whole new world for most. But the good news is I'm here to tell you some of what you need to know. So let's get to it.
In summary, Medicare is essentially a US federal health insurance program for people age 65 or older and people with certain disabilities or end-stage renal disease. Now, even though Medicare is generally for those aged 65 and older, it doesn't necessarily mean you need to have Medicare coverage once you reach age 65. This will depend entirely upon you and your potential spouse's situation.
So, what does Medicare pay for? Well, Medicare pays for hospital stays, medical services, and some prescription drugs. But in general, people who receive Medicare must pay part of their healthcare costs on their own. And this is a common misconception in which many people think Medicare will pay for everything since they “paid into the system” their entire working careers, and this just isn't true.
Another even more common misconception is that it pays for long-term care, which is also not true. But I guess that depends on your definition of what long-term care is since Medicare Part A can, in fact, pay for up to 100 days of what is known as skilled care, typically at a skilled nursing facility, if certain conditions are met. Now, skilled care is not the same as long-term care or something like assisted living, in which assistance is needed to complete non-medical daily tasks. And those are also referred to as custodial care. So skilled care is, is totally different. However, Medicare can help cover some transportation costs to things like doctor's appointments and even some preventative care services, which you might actually receive while you're in a long-term care facility of some sort. So, if you're planning on Medicare to take care of a potentially financially devastating long-term care need, you may want to revisit your strategy. And while Medicare doesn't cover everything, it usually ends up being a pretty good deal financially in retirement, especially at a time when cash flow is typically tighter or more heavily scrutinized.
Depending on the types of coverage you ultimately choose, your out-of-pocket medical expenses can actually be very predictable. This makes it easier to plan your cash flow in retirement by eliminating any possible health issues from the list of sudden and unpredictable emergency expenses. So, let me give you a rather quick rundown of the main components of original Medicare, and then we will jump into additional coverage options and some of the pros and cons of each. The first pieces to understand are Medicare Part A and Medicare Part B, otherwise known as Original Medicare. Generally speaking, Original Medicare covers 80% of healthcare costs after some deductibles, and you are generally responsible for covering the remaining 20%.
Part A is for inpatient services, which are for things like emergency hospital visits and even hospice. And Part B is for outpatient services, which are services or supplies that are needed to diagnose or treat your medical condition, and also preventative services. So, think like doctors visits, x-rays, et cetera. Medicare Parts A and B do not cover prescription drugs, however. Those are covered separately under Part D, which is also called a PDP plan, short for Prescription Drug Plan. Or prescription drug benefits can be potentially covered within what is called a Medicare Advantage plan, should you choose to enroll in one. But more on Medicare Advantage plans in a minute.
So, we've already quickly covered the three main components of Medicare. But there are a couple of things you should know about the options for additional benefits above and beyond Parts A and B, so let's start with what are called Medicare Advantage plans. Now, these are sometimes referred to as Medicare Part C, but just know that they're the same thing. Medicare Advantage is essentially one of two options, if you will, in order to get additional benefits or coverage that goes above and beyond just parts A and B alone. However, a Medicare Advantage Plan is not required whatsoever.
The other option for additional coverage is a Medicare supplement plan, which is also sometimes called a Medigap plan. We will cover those next, but just know that Medigap and Medicare supplements are the same thing.
So, what are Medicare Advantage plans? Medicare Advantage plans are health insurance plans offered by private insurance companies that are approved by Medicare. And just as a side note, just because they are “approved by Medicare” doesn't mean that they're recommended by anybody in particular. This will depend entirely upon your situation, of course, and your specific needs. If you ever begin looking into Medicare Advantage plans or simply do a quick Google search, you'll come to find that there are many, many different insurers and plans to choose from. The key to understand is that each one works a little differently.
MA plans, which we will call them for short, are designed as managed care plans, kind of like HMOs and PPOs you might be used to hearing about. Medicare Advantage includes Medicare Parts A and B coverage, which is your hospital and your outpatient care, and they usually, not always, include Part D as well. Remember, that's your prescription drug coverage. In summary, you enroll with a private insurance company that is approved by Medicare to manage most of your care, and Medicare’s advantage plans are simply a method or product used to obtain that additional Medicare coverage. They're a pretty popular choice due to the fact that they essentially bundle a lot of your health coverage needs, and some plans even market having a zero-dollar premium, and in fact, that's getting more and more popular. You're probably seeing commercials and different ads for those kinds of plans all of the time now. In most MA plans, you need to use the plans specified doctors and hospitals, which are referred to as in-network providers. Otherwise, you will pay more or possibly all of the costs of care. Medicare Advantage plans will cover at least everything that Medicare Parts A and B cover. They have to. You get your Part A and B coverage through your Medicare Advantage plan. This means that you're covered in an emergency situation or if you are in need of some sort of urgent care. And this is true even if you have to receive care in an area that's not covered under your MA plans network. Now, in addition to the part A and B coverage, these plans will also offer some additional benefits and cost structures. Some examples of those might be something like a gym membership, hearing aid coverage, or dental and vision coverage, for example. And none of these things are covered by original Medicare, which is just Parts A and B alone. Of the many MA plan options that are out there to choose from, each will have different flavors of coverages and costs.
So, just to give you an idea, some of the key differences could be your overall benefits and coverages: the premiums you might pay, co-payments, the different deductibles you may have, and there's different deductibles for different pieces of the MA plans, your share of the costs of care, so this is also called co-insurance.
Now, that's the really important one because that is the one that can be somewhat catastrophic if something really bad were to happen to you and what your out-of-pocket maximum is, which is basically the most you can be out of pocket before they take over all of the coverage. Now, remember, these plans can charge different out-of-pocket costs and can each have different rules on how you get services, and the rules can change each
So, a couple of examples of those rules might be whether or not you need a referral to see a specialist or whether or not you have to go to doctor’s facilities or suppliers that belong to the plan for non-emergency and non-urgent care matters. Now, there are also several instances where you may not want or need a Medicare Advantage plan, and some examples of those are you are not Medicare eligible, so you're not age 65, or you're not over age 65 and leaving your employer's plan. If you are still covered under your employer's group health plan, you likely don't need Medicare yet other than maybe Part A, depending on the size of your current employer. Therefore, again, you won't need a Medicare Advantage plan, either. You may choose to only have original Medicare, which is just Parts A and B, which is your hospital, and your outpatient care maybe paired with a separate prescription drug plan. Another comprehensive option is to enroll in parts A, B, and D and a Medicare supplement plan.
Now to the stuff you really want to know, what does it cost?
The costs of Medicare Advantage plans work differently depending on the particular plan and insurer, of course. You may pay a monthly premium for a Medicare Advantage plan That would be in addition to your Part B premium. Many plans nowadays advertise having a $0 premium, like I said before, but there are always trade-offs to be aware of, typically in the form of cost sharing or what we call co-insurance.
When enrolled in a Medicare Advantage plan, you will also still have to pay the annual deductible for Part B, and your MA plan will likely have its own deductibles as well. Now most MA plans have separate deductibles for both medical needs and pharmaceutical needs if it were to include the prescription drug coverage. In many plans, you will typically also make co-payments for covered services.
Now, please note that your co-payments cannot be offset by the purchase of a Medicare supplement policy. Again, these are two different types of additional coverage options. You can't have both simultaneously. It's one or the other. MA plans also have annual out-of-pocket maximums. Unlike Medicare Parts A and B, which is a good thing. This means that once you reach your plans maximum, you'll pay nothing more for covered services during the year. Now, just as a heads up, monthly premiums that you pay for the plan do not count towards your annual out-of-pocket maximum. In fact, any costs associated with the outpatient prescription drug coverage that the plan might have also do not apply to the annual out-of-pocket maximum. They have their own out-of-pocket maximum.
And hey, be careful with $0 premium plans. This is the hook the insurers are throwing in the ocean. That's why you see this advertised all over TV. When comparing plans, don't always shop for the lowest premium. Although they can definitely make sense for you, Medicare Advantage plans can also just as easily be a classic example of you get what you pay for.
For example, if you find a plan with low or no premium, that could mean that the out-of-pocket maximums are high or that the plan network includes only one facility to receive care. Those are just a couple of examples, but the point is be careful. You should review the summary of benefits and evidence of coverage for each plan you are comparing.
Okay, moving right along. Now let's dive into these Medicare supplement plans I keep talking about, also referred to as Medigap. Now, this is essentially your second option for additional coverage that goes above and beyond just Parts A and B alone. And again, you can't have an MA plan and a supplement plan at the same time. It's either or. These are your different options for additional coverage. Medicare supplement plans supplement your original Medicare benefits. Therefore, you have to have Medicare Parts A and B.
The main purpose of the supplement plans is to fill the gap and supplement that 20% co-insurance that you're responsible for when it comes to Parts A and B. They all cover the 20% under Part A, and most, but not all, supplement plans cover the full 20% co-insurance with Part B. They will also cover the Part A annual deductible, which for reference, is $1,600 in 2023.
Now, this type of coverage is desirable if you don't want to ever be surprised by a massive unexpected out-of-pocket medical bill in retirement. Your healthcare costs become more predictable when you have one of these plans.
As I mentioned earlier, supplement plans do not include prescription drugs, so if you go the supplement route, you'll have to sign up for Part D on its own, which is actually really easy to do on medicare.gov. They have a great system there online, and it makes it very easy to compare plans and shop for them. I'll put a link to that in the show notes.
Now, in addition, supplement plans also do not include the extra benefits like hearing or dental, and vision coverage. This essentially means that if you think you need those coverages, then you'll have to get them directly from insurance carriers who offer them, and there are many, so I wouldn't worry too much about that. Most people think this is a hassle initially because they have all of these moving pieces, but what I've found in practice is that when most people look into the costs and the benefits of some of these coverages, they find that it doesn't even make sense to have one or more of them. So, I'm referencing the vision or dental, of course.
However, this will obviously depend upon your individual situation and needs, but I urge you to look into the cost of those coverages and what you're getting for it. Don't just automatically think you need dental and vision coverage because you might have had that while you were working and were covered under an employer plan.
Now supplement plans are also offered by private insurance companies but are subject to government regulation. And to make your head spin a little more, there are a total of eight Medicare supplement plans available regardless of what company. They're labeled by an alphabet soup, and it starts with Plan A, then B, D, G, K, L, M, and N. There were ten plans previously. However, Plan F and C are no longer available for people that are new to Medicare as of January 2020.
Now each lettered plan has different levels of coverage, so some of those key differences are your overall benefits and coverages, premiums that you pay, deductibles, your share of the cost of care, again, co-insurance. Now, although most plans pay the entire 20% of that co-insurance you would otherwise be responsible for, there are a couple that don't pay the entire cost. Your out-of-pocket maximum can be different. Part B, excess charge coverage and whether or not foreign travel emergencies are covered and to what extent.
The two supplement plans providing the most comprehensive coverage currently are plans F, G, and N. Now, I know I said that Plan F is no longer available to people new to Medicare, but if you had a plan F prior to 2020, you're still able to keep it. There are some key differences to some of these plans that you need to make sure you know before deciding on a plan or comparing it to any other plan. There are some very nice and easy-to-read charts out there that compare these different lettered plans, and in fact, I'll include one in the episode show notes for today to help you out.
Now, one other important thing to understand is that a Plan C is a Plan C, and a Plan G is a Plan G, et cetera. It doesn't matter what private insurer you buy a particular plan from. The types of plans are the same from insurer to insurer, and they have the exact same benefits. So, what's the difference between the different companies? Well, literally, it all has to do with premium pricing and, from experience, what I would say is, more importantly, service. The service between the different insurance companies can vary dramatically. So, you might want to look up some reviews from some of the companies or talk to somebody you know that maybe has a Medicare supplement plan to see their experience with that company's service.
Now another difference it relates to premiums might be that a certain company offers a household discount. So, if you and a potential spouse both sign up with that, ensure they might give you an even bigger discount on your premiums.
So here are some of the key reasons why someone would explore a supplement plan, to begin with:
Reason number one, you get to choose. Your health plan doesn’t choose. Your doctors, your hospitals, whenever and wherever you want in the entire USA, as long as they accept Medicare, which most hospitals do. You don't have to worry about your doctor or hospital leaving a provider network, and you never need a referral to see a specialist nor a prior authorization from the plan for a diagnostic procedure or hospitalization.
Two, your coverage is guaranteed renewable. Meaning that if you pay the premiums in a timely manner, your benefits cannot be canceled or decreased. You will not be getting a notice that your health plan’s benefits have changed or that the plan is terminating.
Three, if you relocate anywhere in the USA or you travel often in retirement, you do not need to find a new health plan. All doctors, hospitals, and labs in your new or your temporary winter residence remain available to you without any out-of-network charges.
Four, you will have predictable costs. Like I mentioned previously, the most popular supplement plans coordinate with Medicare to leave you with little or even no out-of-pocket costs for any and all Medicare-covered medical and hospital services. You need only to pay your monthly premium and a rather small annual deductible for Part B if it's even used.
Five, you can customize the drug benefits that best match your usage and your budget, and that's essential because you will be getting Part D separately on its own, and you will compare and shop for the different prescription drug plans and some of them are even tied to the specific pharmacy that you like to visit. This is unlike many MA health plans that actually bundle the outpatient prescription drug coverage with the medical and the surgical coverage. A supplement plan does not bundle the outpatient drug coverage together with the medical or surgical benefits.
Okay, so what are the costs of supplement plans? Well, supplement plans have a monthly premium that is paid in addition to your Part B premium and, actually, potentially Part A premium if you don't have enough credits. It is also paid in addition to your Part D premium, which is your prescription drug plan. The costs depend on the method used by the various insurers, but the most common method nowadays, by far, is what is called the attained age-rated method. And this simply means that your initial pricing when you sign up for one of the supplement plans is based on your age at the time the policy is signed or issued. As an example, I will reference the most popular and comprehensive plan available right now for most new people to Medicare, which would be Plan G.
So, let's say the initial premium for Daniel, age 65, is $155 a month for Plan G. Plan G will leave Daniel with little out-of-pocket for Part A or B services. The biggest expense other than his premiums would likely be his Part B annual deductible if he needed some sort of outpatient care during the year, which for reference, in 2023 is $226. Then we need to add in the Part B base premium of about $165 a month and a prescription drug plan of, say, $40 a month. Now, I'll just caveat here that the prescription drug plans can vary from as little as $10 a month to upwards of $60 a month for the base premium, but on average, they're in the $30 to $40 range. I also want to note that your Part B and Part D premiums could be more, possibly much more, if you're a high-income earner while on Medicare. This is called the Income-Related Monthly Adjustment Amount, or IRMA for short. We will dive deeper into this concept in a later episode. Most people, however, will pay just the base premiums for Part B and Part D.
So now we are at around $360 a month total in premiums and a possible annual deductible of a little over $200 for very, very comprehensive coverage with very predictable out-of-pocket expenses, which for the most part, are the premiums and the annual deductible that I just mentioned. The only other possible variable costs would be additional dental and vision or hearing coverages that you might get on your own or potential cost sharing with regards to your prescription drug coverage. Even then, there's an out-of-pocket max. In fact, under new legislation, by 2025, the prescription drug out-of-pocket max will be capped at $2,000 per year, which is huge for those with heavy prescription needs.
To put this in perspective, someone in their thirties currently paying for health insurance through, say, the health insurance marketplace can be paying $300 to $500 a month in premiums for fairly standard coverage with a several thousand dollars deductible. They'll also have to share costs on certain types of care, and they'll have a several thousand dollars out-of-pocket maximum as well. So, when you put it in that perspective, you can see that Medicare can be a pretty good deal financially.
So now, if we compare your two options that we've discussed, your Medicare Advantage and your supplements, Medicare Advantage actually looks very enticing because everything seems to be bundled together under one plan, which can be easy to manage and track, and you can have dental and vision and hearing care, and again, even a gym membership. And you might possibly pay nothing in premiums. So why not just automatically go with that? Well, I would say don't jump to conclusions just yet, because this will depend on your specific circumstances.
Let's go over some of the comparisons between coverage options one more time:
So first, most MA plans offer extra coverage such as vision, hearing, dental coverage, even gym memberships, and meal delivery, or transportation. Supplement plans do not offer these extra benefits. You can still get these benefits, but you'll have to go purchase them separately from the different carriers that offer them. However, it's important to understand that many extra dental and vision plans, for example, are oftentimes HMO-type plans, which means they have networks. And the optometrist or dentist that you've gone to for years may not be in that particular network.
So, for example, you get a Medicare Advantage plan, and it has dental included, and you're excited. You go to see the dentist for preventative care, and you hand them your insurance, and they say, ‘Hey, guess what? We can't take this,’ because the dentist is not in that network. So you wanna be careful of that.
Another comparison is having to see doctors and specialists in-network on an MA plan could potentially be a problem. This can be a very big problem for those of you who are frequent travelers or plan to travel often in retirement or even for snowbirds.
Another comparison could be that Medicare plans have bundled services. So, it's basically one plan to manage, and that makes things very easy and very nice. You usually deal with one insurance company. With supplements, you will have Medicare A and B, and you'll have your supplement plan and likely a prescription drug plan, and then any other ancillary dental or vision or hearing insurance as well if you've purchased those separately. So, this can be many different plans, and there can be many different insurance companies that you have to reach out to, which could provide different levels of service.
Another comparison could be that in MA plans, again, you need a referral to see a specialist, and they usually have to be in a network, and in supplement plans, you don't. You just don't even need a referral to begin with if you want to see a specialist. And while you remain healthy and do not frequently need care, an MA plan could result in significant savings due to the low or no monthly premium, especially when compared to a supplement plan, which will have a premium, and they're oftentimes higher than the Medicare Advantage premiums. However, I want to be sure you understand this. You'll want to plan for your future long-term health and the different possibilities down the road. Don't necessarily look at your health right now and say, “Oh, okay. I'm really healthy, so I need bare minimum coverage.” Remember, we're ensuring against a catastrophic potential loss. How bad can costs get when something comes up? Not if because something will happen. If and when you become very sick with cancer, diabetes, or other diseases, with an MA plan, you will likely begin to bear much higher and more unpredictable costs up to the out-of-pocket maximums. And this is due to having to pay part of the cost for covered services such as possible co-insurance, co-pays, and deductibles.
And last but not least, MA plans can choose not to cover the costs of services that aren't medically necessary under Medicare. And there's actually a term for that, and it's called Accepted Standards of Medicine.
Okay. Phew. That was a lot, I know. And as you can tell, choosing between Medicare Advantage and a supplement plan requires you to do your research and know your health and the different possibilities that could arise down the road. This is a major part of your retirement plan. You want to do it right.
Now, even though you can change your mind, or it's possible to change coverage types down the road, you can run into obstacles when trying to do so, and it can be very cumbersome. You will also need to do somewhat of a self-analysis on the likelihood of needing extensive care down the road. One extremely important factor is to know what your pocketbook will look like in a potentially lengthy retirement.
The purpose of insurance, again, is to ensure the things that can devastate you financially, not necessarily for the little things. This is risk management 101, and as a reminder, plan for longevity. Medicine has come a long way thus far and likely will not stop advancing. So that's why we have to plan for a lengthy retirement. And if you want to make the whole decision process easier, create a comprehensive financial plan that addresses all areas of your life, or get someone to help you develop one. This is crucial to making a well-informed decision, especially when it comes to your healthcare. Know what you can afford as far as premiums and know if you can afford an emergency and how that may affect your other wants or needs in retirement.
That's it for today's show. If you have a minute and find this information actionable and insightful, and you wanna stay up to date on the latest and useful retirement planning content, please subscribe to or follow the show on your podcast app. If you'd like to learn more about the rules and strategies discussed in today's show, you can find the links to the resources we have provided in the show notes on your podcast app, or you can visit us at retiredishpodcast.com/9.
To help you plan for the new year, see today's show notes as we are including our newest 2023 quick reference guide that includes the important numbers to know for 2023, such as retirement plan contribution limits, IRMA Medicare surcharge brackets, tax brackets, and more, so you can start planning for the new year.
You can also sign up for the monthly Retired-ish newsletter there as well, where each month, we discuss money and emotions, investing, tax, estate tips, Medicare and Social Security, and even a brief discussion about the current markets in layman's terms.
We always include something actionable in our newsletters so that you can implement them right away, such as how-to guides and other simplified strategies. This can all be found retiredishpodcast.com/9.
Thank you for tuning in and following along. See you next time on Retired-ish.
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