Trying to Make Sense of Medicare and its Moving "Parts"
Medical coverage is a major part of your (financial) well-being, particularly in retirement. Even if you're a few or more years away from needing it, it pays to know Medicare and the different plan options available to help you cover healthcare costs. Let's Medi-talk. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
Reader Requests
I thought I'd explore this topic because I've gotten several questions from readers lately about various Medicare options. Not being an expert on the subject, I’ll simply speak from personal experience; thus, the subtle bias reflected in this blog should be viewed with that in mind.
The subject can be very confusing and there are a lot of misconceptions out there. For example, many folks think that Medicare will pay for everything related to their healthcare needs after reaching age 65. Not so. In fact, Medicare's out-of-pocket costs can be a serious drain on your retirement savings account.
Medicare 101
Original Medicare is a fee-for-service health plan that has two parts: Part A (Hospital Insurance) and Part B (Medical Insurance). Medicare Part A is the portion of Medicare that pays for your inpatient hospital care, hospice services, and limited stays at a skilled nursing facility. Most people won’t pay a monthly premium for Medicare Part A, but it does have other costs, like deductibles and coinsurance. However, you will pay a premium each month for Part B. It will be automatically deducted if you get any of these benefit payments:
Social Security
Railroad Retirement Board
Office of Personnel Management
If you don’t get these benefit payments, you’ll get a bill.
These two parts combined only cover about 80% of folks’ major medical costs and not all healthcare services are Medicare-approved. In fact, Medicare only covers about 52% of the total healthcare costs most healthy folks incur.
Why? Original Medicare does not cover important routine healthcare for dental, vision, hearing, and other health maintenance services that are not on Medicare’s “medically necessary” list. All of these "uncovered" costs must be paid out of pocket unless an individual enrolls in a Medicare-related plan that covers them. Also, with a few exceptions, most prescriptions aren't covered in Original Medicare. You can add drug coverage by joining a Medicare Drug Plan (Part D).
There are three primary ways to help mitigate costs over and above Original Medicare healthcare coverage:
Supplement (AKA Medigap)
Advantage (AKA Medicare Part C)
Medicare Medical Savings Accounts (MSAs)
#1 Medicare Supplement (Medigap) Plan
I’ll start with the Medicare Supplement plan since that’s the plan I personally coupled with Original Medicare from day one. A Medicare Supplement plan has no specified network and will pay for medical care out of pocket – care that isn’t or is only partially covered by Original Medicare Part A and Part B. A Supplement plan policyholder can use any healthcare provider and facility who’s willing to accept Medicare/Supplement coverage.
Here's how it works: When you go to the doctor, your Original Medicare will pays its share of Medicare-approved “medically necessary” healthcare costs. Then…your Supplement plan pays its share of those costs not covered by Original Medicare. Supplement policyholders use their Original Medicare card and private insurance Supplement card for services rendered. The important distinction under this arrangement is that individuals and their healthcare providers are in control of the policyholder’s healthcare. In short, once it has been determined that your doctor, hospital, skilled nursing facility, etc. accepts assignment of your healthcare, you and they are in charge!
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Not surprisingly, a Medicare Supplement plan requires you to pay a monthly premium that will likely increase from year to year. That’s certainly been my experience. However, by paying larger monthly premiums, the plan beneficiary is protected from unlimited Medicare costs. In short, there is no annual limit and no lifetime limit on Supplement plans. I speak from experience when I say a Supplement plan can save its beneficiary tens of thousands of dollars in the long run.
By the way, Medicare Part D (Drug Coverage) is not included in the Supplement, which means that if you want a prescription drug plan you will have to enroll in and pay separately for such a stand-alone plan.
#2 Medicare Advantage (Part C) Plan
When an individual chooses an Advantage plan – about 48% of the Medicare crowd is enrolled in one – the federal government pays a lump sum to the issuing private insurer every month for care provided under terms of that specific plan. Of note, to qualify for any Advantage plan, the prospective policyholder must be enrolled in both Medicare Parts A and B and must live in the service area six months out of the year. Once enrolled, Part B must remain in effect.
A Medicare Advantage plan provides all Medicare Parts A and B benefits, and many include Part D (Drug Coverage) benefits. Under the various Advantage plans – often credited with increasing competition for healthcare – each private insurer has the flexibility to add additional benefits, charge different premiums, and offer their own provider networks. Many offer free health club memberships, 74% provide access to dental benefits, 79% offer vision care, and about 72% offer some financial help for hearing aids. Advantage policyholders must use their Medicare Advantage insurance card rather than the Original Medicare card when applying for medical services.
#3 Medicare Medical Savings Account (MSA) Plan
According to Medicare.gov, Medicare works with private insurance companies to offer you ways to get your healthcare coverage. These companies can choose to offer a consumer-directed Medicare Advantage Plan, called a Medicare MSA Plan.
Medicare MSA Plans combine a high-deductible insurance plan with a medical savings account that you can use to pay for your healthcare costs.
High-deductible health plan: The high-deductible Medicare Advantage Plan (Part C) only begins to cover your costs after you meet a high annual deductible, which varies by plan.
Medical Savings Account (MSA): The Medicare MSA Plan deposits money in a special savings account for you to use to pay healthcare expenses. The amount of the deposit varies by plan. You can use this money to pay your Medicare-covered costs before you meet the deductible. These plans are similar to Health Savings Account Plans available outside of Medicare. (Refer to my blog, "Are Health Savings Accounts Too Good to be True?" for more info about HSAs).
You can choose your healthcare services and providers (doctors, other health care providers, or hospitals) because MSA plans usually don’t have a network.
Medicare Premiums
In the Medicare program there are several different types of premiums in addition to your Medicare Part B premium.
If a policyholder’s annual income is above a certain threshold, the beneficiary may pay an Income Related Adjusted Amount (IRMAA) based on his or her IRS-adjusted gross income from two years prior. This monthly premium will likely adjust annually.
In addition, beneficiaries will pay a) a deductible for medical expenses before an Advantage plan begins to pay its share; b) a co-payment, which is a set dollar amount the beneficiary pays for services rendered; and, c) co-insurance, which is a percentage of the total for services rendered. In the case of a Supplement plan (with no annual limit and no lifetime limit), the policyholder pays a hefty monthly premium for medical coverage, and if desired, another monthly premium for Part D.
Some Advantage plans require beneficiaries to pay a monthly premium, but one that is considerably lower than most Supplement plans. Others do not. But as you might suspect, zero-premium Advantage plans are not free.
In Sum
For those who have reason to anticipate significant health problems, a Supplement (Medigap) plan, if affordable, is probably the way to go. Yes, your monthly premiums will be higher, but out-of-pocket costs are likely to be much lower than those associated with an Advantage plan over time.
Alternatively, if an individual anticipates good health, he or she can save quite a bit with those lower Advantage plan premiums…particularly someone with a plethora of prescription drug costs. An Advantage plan that offers drug coverage could be “cost beneficial” versus enrolling in Medicare Part D.
In any event, folks that have healthcare insurance through Original Medicare and who desire additional protection should expect to pay thousands of dollars each year for this major medical coverage. And, depending on the type of coverage chosen, costs can vary significantly.