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What You Don’t Know About Medicare Can Cost You

For years, rising healthcare costs have been a top concern among Americans in or nearing retirement. High inflation has only made paying for healthcare more challenging, especially for those on fixed incomes. Based on a recent analysis of healthcare costs and inflation, even if current inflation rates are temporary, a short-term spike in inflation can have long-lasting repercussions for healthcare expenses in retirement. That’s because inflation has a compounding effect on these costs where each price jump impacts all future costs. In other words, the bigger this year’s increase, the higher the cost basis for next year’s increase, and so on. For example, assuming healthcare costs grow at 1.5 to 2 times the rate of the consumer price index (CPI) over the next two years (7.9% at the time the analysis was conducted), lifetime health care costs for a healthy 65-year-old couple are projected to grow by $85,000 to a total of $673,587 over their life expectancy.

While estimates for healthcare costs in retirement vary somewhat from one study to the next, all point to the need for people to factor these growing costs into their planning. But what about Medicare? Doesn’t that pay for healthcare in retirement?

Medicare helps to offset healthcare expenses but does not cover all of the costs you may encounter. Once you join Medicare, you’re still on the hook for certain costs, which may include premiums, over the counter and prescription drugs, and all or a portion of certain medical services and/or devices. In addition, Medicare also doesn’t cover one of the highest expenses many people face in retirement, which is long-term care. That makes it critical to understand how Medicare works and what is and isn’t covered well before you sign up or change plans.

Managing Medicare costs

Traditional Medicare Parts A and B cover certain medical services and supplies in hospitals, doctors’ offices, and other health care facilities, and Part D covers prescription drugs. Medicare supplement insurance, or “Medigap” policies are available through private insurance companies and may help cover certain expenses not covered by Medicare Parts A and B, such as coinsurance, hospital deductibles and other out-of-pocket costs. When you buy a Medigap policy you must have Medicare Parts A and B.

Another thing to be aware of is that Medicare costs are subject to change annually. For example, Part A deductibles, coinsurance and premiums will increase in 2023. Keep in mind, most people do not pay Part A and are enrolled automatically when they turn 65. (Part A premiums, which generally increase each year, only apply if you paid Medicare taxes for less than 40 quarters during your working years.) The opposite holds true for Part B in 2023. The standard monthly premium for Medicare Part B enrollees will decrease by $5.20 a month to $164.90 from $170.10 in 2022. The Medicare Part B deductible will also decrease from $233 in 2022 to $226 in 2023.

A Medicare Advantage Plan is another way to get your Medicare Parts A and B coverage. Medicare Advantage Plans, also called “Part C” or “MA Plans,” are offered by Medicare-approved private insurers that must follow rules set by Medicare. Most Medicare Advantage Plans include drug coverage (Part D). Many have no premiums and offer low or no deductibles, and most plans set limits on the maximum out-of-pocket costs you’ll pay during a plan year. However, you’ll need to use health care providers who participate in the plan’s network. While some plans offer non-emergency coverage out of network, it typically comes at a higher cost. You also may need to get approval from your plan before it covers certain drugs or services.

There’s something else you need to keep in mind as you determine the best options for your needs. If you are enrolled in a Medicare Advantage plan for more than 12 months, then decide to change to traditional Medicare, Medigap plans are no longer obligated to take you without underwriting, which involves passing a health screen. That’s important if you have previously been diagnosed with certain illnesses or chronic conditions. For a comprehensive look at what Medicare does and does not cover, visit Medicare.gov.

Don’t miss important deadlines

Once you’ve chosen the options that best fit your needs and budget, one of the best ways to manage ongoing costs is to keep important deadlines in mind. Many people don’t realize that missing key deadlines when signing up for Medicare or making changes can result in paying more for these benefits over time. For example, most people who are already collecting Social Security disability or retirement benefits are automatically enrolled into Medicare Parts A and B when they’re first eligible. If you’re not receiving Social Security benefits, you can sign up for Part A any time after you turn 65. However, in most cases, if you don’t sign up for Part B when you’re first eligible, you may have a delay in getting Medicare Part B coverage in the future, and you may have to pay a late enrollment penalty for as long as you have Part B. In addition, certain higher income beneficiaries are subject to a Part B surcharge called the Income-Related Monthly Adjustment (IRMA).

To help avoid penalties and higher premiums, keep the following in deadlines in mind:

  • Initial Enrollment Period (IEP) – Your IEP lasts for 7 months, starting 3 months before you turn 65, and ending 3 months after the month you turn 65. Beginning January 1, 2023, when you sign up for Medicare the month you turn 65 or during the last 3 months of your IEP, or during the general enrollment period, your coverage starts the first day of the month after you sign up.
  • General Enrollment Period (GEP) – The Medicare GEP occurs each year between January 1 and March 31. It’s generally the only time that people who did not sign up during their initial enrollment period and are eligible for Medicare Parts A and/or B can enroll. Beginning January 1, 2023, your coverage will start the first day of the month after you sign up.
  • Special Enrollment Period (SEP) – Participants who elected Medicare Advantage and/or a Part D prescription drug plan may be eligible to make changes to their coverage under a SEP if they experience a qualifying life event, such as a move to a different state or the loss of employer health insurance coverage. In addition, a new special enrollment period will be available in 2023 to cover exceptional circumstances. This option will help people who miss an enrollment period due to certain events like a natural disaster or another emergency, incarceration or losing Medicaid coverage. Visit Medicare.gov to review a full list of special circumstances and applicable rules for each SEP. Keep in mind, if you have employer-based health insurance through your (or your spouse’s) current job, you don’t have to sign up for Medicare while you or your spouse are still working. You can wait to sign up until one of you stops working or you lose your health insurance, whichever comes first.
  • Open Enrollment Period (OEP) – Medicare’s OEP occurs each year from October 15 to December 7. During the OEP, anyone with Medicare can make changes to their health plans and prescription drug coverage for the following calendar year. Even if you weren’t planning on making changes to your benefits this year, take a few minutes to review what’s new. Always review the materials your plan sends you, including the “Annual Notice of Change” and “Evidence of Coverage” to make sure your plan will still meet your needs for the following year. You can also join, switch, or drop a Medicare Advantage Plan during the OEP. If you join a Medicare Advantage Plan during this period but change your mind, you can switch back to traditional Medicare or change to a different Medicare Advantage Plan (depending on which coverage works better for you) during the Medicare Advantage Open Enrollment Period (January 1 – March 31). If you haven’t received your copy of the official U.S. government handbook, download Medicare & You 2023 or visit Medicare.gov for more information on plan changes and benefits.

While Medicare provides a wealth of information on this important benefit, there’s no question that wading through the alphabet soup of plans and options and comparing costs can be confusing and time consuming. That’s where an experienced financial advisor can help. Ask your advisor or team about the Medicare, elder care and/or long-term care planning resources they provide to help you navigate healthcare costs in retirement, or if they can refer you to a financial professional who specializes in this area. Remember, paying for healthcare costs in retirement is an important part of a long-term strategic approach to planning that not only addresses these expenses but all of your lifestyle goals in retirement.

To learn more about getting started with Medicare, download our complimentary guide, When Should I Sign Up for Medicare?