In Part 1 of this series we discussed Social Security retirement benefits. Here in Part 2 we discuss Medicare and how it fits into your retirement plan. Part 3 explores how much money you will likely need for retirement and how to achieve that goal.
What is Medicare?
Medicare is a government health insurance program that helps pay for medical expenses when you reach age 65. Medicare benefits are also available for people that have not yet reached age 65 under certain specific circumstances/conditions. For the purpose of this article we will focus on Medicare for people age 65 and older.
Medicare is composed of several parts – A, B, C, and D.
Parts A and B are known as “original Medicare”. Part A helps pay for hospital expenses and inpatient fees. Part B pays for doctor fees and outpatient fees. Medicare pays medical expenses directly to providers for parts A and B.
Part C is offered through private insurers that have been approved by Medicare and combines parts A and B in addition to offering expanded coverage options. There is typically an additional cost for part C coverage.
Part D is coverage for prescription drugs. This coverage is also offered through private insurers that have been approved by Medicare. There is an additional cost for part D.
You choose either to receive original Medicare or Part C. If you choose original Medicare you can choose to receive part B in addition to part A. Part D can be added to any of these options.
What Does Medicare NOT Cover?
Medicare does not cover the following:
- Long-term care
- Most dental care
- Eye exams related to prescriptions for glasses
- Cosmetic surgery
- Hearing aids and exams for fitting them
- Routine foot care
To determine if Medicare covers a specific service you can use their online search tool at www.medicare.gov/coverage . For more detailed information on the full range of covered services see: https://www.medicare.gov/pubs/pdf/10050-Medicare-and-You.pdf
How Do You Qualify?
Anyone age 65 or older who has been a legal resident in the U.S. is qualified to receive Medicare. Other non-age related qualifications exist for certain conditions not discussed here. If you (or your spouse) have been paying Medicare taxes for 10 or more years (these are deducted from your salary by your employer) and you are 65 or older and you are either a U.S. citizen or a lawful alien residing in the U.S. for 5 or more years then you are qualified for “premium free” Medicare Part A. Otherwise you will pay a monthly premium amount.
Medicare is funded by payroll taxes, and by out of pocket expenses incurred by the recipient including insurance premiums (for Parts B, C, D, and in some cases Part A), deductibles, and coinsurance.
Let’s review costs for Parts A and B. We do not include Parts C and D (which are private insurance) as they vary depending on coverage options and insurance providers.
The table below lists costs for an individual for Medicare Part A (all costs in this article are for 2014):
The next table shows the monthly 2014 premium costs for Medicare Part B based on a single person’s adjusted gross income. If you are married and filing taxes jointly then the AGI ranges are doubled:
To begin receiving most Part B benefits a person must first pay the yearly deductible amount of $147. The table below lists out of pocket Part B expenses:
Please note that there are no maximum yearly or lifetime caps for out of pocket expenses. This means that there is no limit to the amount you are responsible for paying.
Please also note that the amount of covered services shown above only applies if you doctor, service provider, or facility accepts “assignment.” Assignment means that your provider has agreed to be paid in full according to the fee schedule set by Medicare.
Some doctors choose to be “non-participating” providers. They still accept Medicare insurance, just not for the full amount of the bill. They can charge you a maximum of 15% more than the Medicare reimbursement amount. You will be responsible for paying this amount.
Be aware of “private contracts” with doctors. A doctor who does not accept Medicare may want you to sign a private contract for their services. Note that Medicare does not reimburse doctors who have private contracts with their clients as these doctors are non-participating providers. You will be responsible for paying the full amount.
You are not obligated to go to a doctor who insists on a private contract. You can choose to see a doctor who accepts Medicare instead.
There has been a trend recently of more doctors refusing to accept Medicare insurance. A survey of the Texas Medical Association shows that approximately 60% of their doctors accept Medicare today compared to 80% in the year 2000.
You can check if your doctor accepts Medicare at www.medicare.gov. If not you can use their online tool to find a doctor who accepts Medicare in the area where you live.
A Few Examples
Let’s take a look at what ailments seniors typically face.
According to US government data (https://agingstats.gov/):
28.6% of Medicare recipients age 65 and older had one or more limitations in performing activities of daily living (ADLs). These include bathing, dressing, eating, getting in/out of chairs, walking, or using the toilet.
22.6% of people age 65 and older suffer from disabilities in one or more of the following areas:
- Vision 3.3%
- Hearing 4.2%
- Mobility 17.1%
- Communication 1.2%
- Cognition 2.7%
- Self-care 3.0%
The following are the death rates for the group of persons ages 65 and older for specific ailments (rates are per 100,000 people, thus 1062/100,000 = 1.062%):
- Heart disease – 1062
- Cancer – 915
- Stroke – 247
- Diabetes – 119
- Chronic lower respiratory diseases – 277
- Unintentional injuries – 105
- Influenza / pneumonia – 97
- Alzheimer’s – 200
The following are the percentage of people ages 65 and older who reported having the listed chronic health problems:
- Heart disease – 29.4%
- Hypertension (high blood pressure) – 55.9%
- Stroke – 7.9%
- Emphysema – 4.2%
- Asthma – 10.6%
- Chronic bronchitis – 5.3%
- Cancer – 23.4%
- Diabetes – 20.8%
- Arthritis – 49.0%
The following are the percentages of people ages 65 and older, by age category, that assessed their health status as good to excellent:
- 65 and over – 77.5%
- 65 to 74 – 80.4%
- 75 to 84 – 75.8%
- 85 and older – 68.1%
The following are the percentages of non-nursing home Medicare beneficiaries ages 65 and older with dementia:
- 65 and older – 10.0%
- 65 to 69 – 3.6%
- 70 to 74 – 4.8%
- 75 to 79 – 9.9%
- 80 to 84 – 15.3%
- 85 to 89 – 24.0%
- 90 and older – 36.2%
The table below lists the average costs for Medicare recipients age 65 and older and the source of payment for those costs:
“Other” in the table above refers to other sources of payment not listed such as VA, private insurance, uncollected amounts, and other public programs.
“**” in the table means that the data was not considered accurate and as such was not included.
On average a person age 65 or older on Medicare should expect to pay $3000 per year ($250/month) out of pocket, in addition to any insurance premiums he/she may pay.
Also, if that person does not have “other” insurance as shown they will likely be responsible for additional expenses. These are average numbers. Let’s take a look at a few specific situations.
Let’s say a retiree with an income less than $85,000 per year has Medicare parts A and B, is taking medication for high blood pressure, and sees a dentist twice a year. That person’s expenses would likely look something similar to this:
Expenses above are yearly other than those in the row “Per Month Average.”
Now let’s say that same person suffers a heart attack and is hospitalized for bypass surgery. The associated costs look like this:
These costs are in addition to the ones in the previous table.
A similar analysis could be made for stroke and also for cancer. So as we can see, medical expenses could be significant during retirement, even with Medicare.
The U.S. government publishes a yearly report on the status of the Social Security and Medicare trust funds. According to the report for 2013 (https://www.ssa.gov/oact/TRSUM/2013/tr13summary.pdf):
“The Trustees project that the Medicare Hospital Insurance (HI) Trust Fund will be the next to face depletion after the DI Trust Fund. The projected date of HI Trust Fund depletion is 2026, two years later than projected in last year’s report, at which time dedicated revenues would be sufficient to pay 87 percent of HI cost.”
The report goes on to say that benefits may only pay 71% of hospital insurance costs in later years, until eventual depletion of the trust fund.
So as we can see, Medicare benefits will likely decrease over the coming years, leaving you with more to pay, unless something is done to change the downward trajectory of the fund. Current suggestions from the government include a tax increase, increasing the benefit age, and/or reducing benefits.
So to summarize:
- Your health expenses are not entirely paid for as a Medicare recipient. You are responsible for some of the costs.
- There is no yearly or lifetime cap on the amount you are expected to pay out of pocket. If you are unhealthy and in and out of the hospital a lot this could be significant.
- Fewer doctors are taking Medicare which means you may need to pay cash to see the doctor of your choice, further increasing your expenses.
- Medical costs may rise faster than the Social Security Cost Of Living Adjustment which means that your medical expenses could grow faster than your Social Security income and deplete your savings sooner.
- The Medicare trust fund is being depleted. It is possible you may receive fewer benefits in the future.
It is clear that Social Security and Medicare may not be enough to provide for a comfortable retirement. In Part 3 of this series we explore how much money and investments you will likely need.
General Medicare information: https://www.medicare.gov
Medicare coverage search tool: https://www.medicare.gov/coverage
Detailed Medicare coverage info: https://www.medicare.gov/pubs/pdf/10050-Medicare-and-You.pdf
Fewer doctors taking Medicare patients: http://www.pbs.org/newshour/bb/health-jan-june13-medicare_03-04/
Statistics on the health of retirees: https://agingstats.gov/docs/LatestReport/Excel/healthstatus.xlsx
Tables 16b, 17b, 19, 22a, 22e, 34a
Costs related to high blood pressure: https://meps.ahrq.gov/data_files/publications/st337/stat337.pdf
Dental costs: https://www.dentalinsurance.org/blog/index.php/2014/07/how-much-does-a-dental-cleaning-cost-without-insurance/
Medicare ambulance fee: https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AmbulanceFeeSchedule/afspuf.html
Medicare costs for heart bypass surgery: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3026958/figure/fig01/
Medicare solvency problems: https://www.ssa.gov/oact/TRSUM/2013/tr13summary.pdf