Medicare is the federal health insurance program covering over 57 million enrollees, most of whom are ages 65 and above.
My observation is that actual out of pocket costs incurred by Medicare enrollees are not well understood. I’ve spoken to some who have the impression that Medicare is free. The purpose of this article is to highlight common sources of Medicare out-of-pocket costs. Recognize that this is a high-level overview, as actual costs are dependent upon individual circumstances, and various programs exist to assist those of limited means with their Medicare expenses. Still, having a basic understanding of the program’s cost components is useful information when estimating healthcare costs in retirement.
Category #1 – Premiums
Most people approaching Medicare have heard of Medicare’s main components, Parts A, B, C and D, as well as private supplemental insurance plans. Enrollment in some combination of these plans will depend on individual circumstances as previously mentioned. Each of these components carries a premium which can range from $0 to several hundred dollars per month. For instance, the standard Medicare part B premium in 2017 is $134 per month, but can be as much as $428.50 for those subject to the maximum IRMAA adjustment. (Refer to my previous blog post regarding IRMAA). The takeaway here is that Medicare enrollees will pay a monthly premium not unlike premiums paid for other types of insurance such as auto, home, life, etc.
Category #2 – Utilization
Utilization is an insurance term related to usage of medical services such as doctor office visits, hospitalizations, prescription drugs, etc. Generally, greater usage of medical services creates higher levels of utilization and often more expense. Deductibles and coinsurance are common forms of utilization costs. A deductible is an out of pocket amount paid by an enrollee before insurance pays. For example, Medicare Part A has a 2017 deductible for a hospital admission of $1,316. This amount is paid by the Medicare enrollee unless they have supplemental insurance to cover that expense. Coinsurance is a cost sharing arrangement between the enrollee and Medicare or an insurer. For example, Medicare Part B will pay 80% of a Medicare approved claim with the enrollee responsible for the remaining 20%. Again, a supplemental policy may cover the enrollee’s 20% responsibility, but the enrollee will likely pay a premium for the supplemental policy. The takeaway here is that the more an enrollee accesses medical or prescription benefits, the higher their out of pocket expense will most likely be.
Category #3 – Non Covered Expenses
Medicare does not cover every service an enrollee may receive. Here is a partial list of services not covered by Original Medicare:
- Dental care
- Vision care
- Hearing aids
- Cosmetic surgery
- Care delivered outside the US (other than emergency care)
- Long term (custodial) care
Certain supplemental plans may offer limited benefits in some of these areas. Also, Part D prescription plans utilize “formularies” or lists of covered drugs which are not all-inclusive. The takeaway from this section is that most enrollees can plan on incurring some out of pocket expenses for services that will not be covered by Medicare.
Category #4 – Penalties
Medicare specifies a set of enrollment periods to cover various enrollee timelines and situations. The most common are the initial, general and special enrollment periods. Failure to enroll when initially eligible can result in financial penalties that extend throughout the enrollee’s lifetime. The takeaway here is to be aware of which enrollment period applies, and to enroll within the proper timeframe so as to avoid any penalties.
Hopefully this article has pointed out that Medicare is not free. Each person’s out of pocket cost will differ due to a variety of factors that are largely dependent upon the plans in which they enroll. Moreover, costs will vary year to year as premiums change and utilization levels fluctuate. The final takeaway is that medical-related expenses will be a significant cost driver in retirement even when enrolled in Medicare.
If you’re interested in exploring what your Medicare-related expenses might look like today, contact Mike Curtiss at 317-939-2144 or email firstname.lastname@example.org to set up a time to meet and review your specific situation.