Talk about the circle of life. Most of us were taught our ABCs between ages three and five. Six decades later, there’s a new alphabet that we need to learn. It’s called Medicare.
Although Medicare benefits generally kick in at age 65 for most people, it’s a good idea to familiarize yourself with, and begin to plan for, the various services offered by this comprehensive government health insurance program several years in advance as part of your retirement income planning. An analysis of the different types of expenses and potential amounts that are and aren’t covered, including calculation of potential out-of-pocket costs, should be part of the planning process.
Organization of services
Medicare services are divided into four Parts: A, B, C, and D. Before presenting a brief introduction to each of the four parts, let’s take a look at how they’re organized into a total health plan. There are two ways that you can organize your Medicare plan: (a) Original Medicare or (b) Medicare Advantage Plan.
Original Medicare, which is an a la carte approach, and is used by most people, includes Part A Hospital Insurance and Part B Medical Insurance as its core components. Part D Prescription Drug Coverage can also be added if you need this coverage. Due to the fact that there are deductibles, copayments, coinsurance, and out-of-pocket expenses that aren’t covered under these individual plans, the amounts of which can be significant, Medicare Supplement Insurance, or Medigap policies, are often also purchased to pay for a large portion of these expenses.
Medicare Advantage Plan
In lieu of being a participant in up to four different plans, assuming a Medigap policy is purchased, some people opt instead for a Medicare Advantage Plan, or Medicare Part C. Unlike original Medicare, which is a fee-for-service program, a Medicare Advantage Plan is much more focused on managed care to help control costs. It’s a more comprehensive approach since it bundles the services covered in original Medicare Parts A, B, and D and Medigap policies, although Part D isn’t always included as part of the package.
Medicare Part A: Hospital insurance
In addition to inpatient care in hospitals, Medicare Part A helps cover skilled nursing facility care, hospice care, and home health care. Enrollment is mandatory if you’re receiving Social Security benefits. There’s no monthly premium if you’ve worked as least 40 quarters of Medicare covered employment, otherwise the maximum premium is $441 a month.
When hospitalized, a participant pays a deductible for each benefit period. A benefit period starts the day that you’re admitted as an inpatient and ends when you haven’t received any inpatient care for 60 days in a row. The amount of the deductible in 2013 is $1,184 for days 1 – 60 and $296 for days 61 – 90. Each participant also has 60 “lifetime reserve days” with a deductible of $592 for days 91 – 150.
Medicare Part B: Medical insurance
Medicare Part B primarily covers medically necessary services from doctors and other health care providers. In addition, it also covers outpatient care, home health care, durable medical equipment, and some preventive services.
Although enrollment is voluntary, it’s automatic if you’re already receiving Social Security. Medicare Part B premiums are means tested using income from your federal income-tax return two years prior to the current year. Monthly premiums range between $104.90 and $335.70 in 2013.
Medicare Part B has an annual deductible of $147 in 2013. After the deductible is met, you typically pay 20% of the Medicare-approved amount of the service if your doctor or other health-care provider accepts assignment.
Medicare Part C: Medicare advantage
As previously stated, unlike original Medicare, which includes Medicare Parts A, B, and D, all of which are stand-alone fee-for-service programs, Medicare Part C generally replaces each of these parts, along with Medigap policies, to provide a single managed care health insurance plan. Most Medicare Advantage, or “MA plans,” include Part D prescription drug coverage; however, for some plans it’s optional.
In addition to offering all the services available from original Medicare, except for hospice care and some care in qualifying clinical research studies, MA plans may offer other coverage. This may include vision, hearing, dental, and/or health and wellness programs.
Medicare Part D: Medicare prescription drug coverage
Medicare Part D prescription drug coverage was added in 2003 and represents the largest overhaul of Medicare to date. Similar to Medicare Part B, monthly premiums are means-tested. It’s run by Medicare-approved private insurance companies and helps cover the cost of prescription drugs.
There are copayments and coinsurance with a coverage gap, or “doughnut hole,” in which a participant is responsible for much of the cost of generic and brand name drugs. Since 2011, the Affordable Care Act has been gradually reducing the amount that Medicare Part D participants are required to pay for their prescriptions when they reach this gap.
Medicare doesn’t cover most long-term care services
As part of your planning, please be aware that Medicare doesn’t cover most long-term care services.
That’s all for your A, B, C, D’s today. To continue your lesson, and develop a Medicare plan that’s appropriate for your needs, please consult with a retirement income planner or Medicare specialist. In addition, you may want to refer to Medicare & You, the official U.S. government Medicare handbook that’s updated annually. There is also an excellent glossary at the end of the handbook with definitions for all of the terms used in this article.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.