I first learned about the complexities and limitations of Medicare when I was 30 years of age due to a family tragedy. On September 22, 1994, my father was diagnosed with pancreatic cancer. He passed away a few months later on December 11, just prior to his 62nd birthday. I contacted our family financial advisor, a commission-based Certified Financial Planner (CFP®), and asked her what I should do regarding my mother’s healthcare insurance coverage. She replied: “Just sign her up for a Medigap plan with Blue Cross of New York; your mother qualifies for Medicare under a widow’s benefit.”— that was it!
When I became a CFP® in 2007, I discovered that my mother and I had received poor financial guidance after my father’s death. Needless to say, it upset me, and that’s why I’m writing today about this subject. I never want any of you to go through what I went through due to my lack of understanding of Medicare healthcare choices, poor advice, and blind trust. More on this subject in the coming months in a case study post devoted to Social Security and Medicare strategies (SSA link) for the surviving spouse. It can be very complicated, as I will illustrate, especially for grieving widows or widowers. In my mother’s case, like many women of her generation, she never wrote a check or selected her healthcare plan. Complicating matters further was the fact that my mother is Japanese, and English is her second language.
The Medicare Supplemental Plan Maze
In January 1995, I found the Medicare coverage options very confusing, and I had no idea what a Medigap plan would cost my mother. It took weeks of research in my spare time to find the answers I needed, and to get my mother appropriate coverage (at least what I thought was appropriate) -- a supplemental plan that overcame the limitations of Medicare.
Now, 20 years later, even with great Internet resources, people are still confused about the coverage they need once they're eligible for Medicare. And the costs have skyrocketed -- I have seen my mother’s Medigap plan cost rise over 10% annually on average over the past 20 years. My mother is now nearly 82 and, thankfully, very healthy. I have modified her original Medigap plan over the past 20 years a few times in an effort to keep costs under control. Her current plan is Plan N (one of many letters used by Medicare to categorize Medigap plans). Her plan premiums just went up again in 2015 to $548.64 per quarter from $497.28, and in 2013, it was $429.83 quarterly --- that’s a 15% year-over-year increase!
Click here (www.medicare.gov) and type: “A quick look at Medicare” in the search field, upper right [or scroll down] for a quick primer on Medicare coverage choices.
A Startling Statistic
According to a recent Nationwide Insurance survey, 4 out of 5 people approaching retirement said they could not estimate how much they expect to pay for healthcare in retirement.1 That’s not a surprise; insurance coverage options remain maddeningly complex, and costs have been rising at more than twice the rate of inflation, averaging 6.9% annually since 1960.2 Adding to retiree anxiety are ongoing changes to our national healthcare coverage -- the Affordable Care Act.
So how much will healthcare really cost you in retirement? Here's a rough idea:
Fidelity’s annual Retiree Health Care Costs Estimate suggests that a 65-year-old couple retiring in 2014 would need $220,000 in total to pay for medical expenses throughout their retirement. (This is assuming the husband lives to 82 and the wife lives to 85.) If a husband and wife live to 92 and 94, respectively, the cost estimate grows to $335,000.3 This estimate does not account for the cost of a long-term care facility.
That quarter-million figure is an essential part of the calculus when you're setting up your retirement plan, and it’s often overlooked. However, it's just an average estimate and this figure will vary depending on your health. For a look at Medicare costs-at-a-glance, click here.
Fortunately, there are three concrete steps you can take to ease your mind and your retirement budget. These steps are:
1. Discovery
Understand your health-related needs based on your history and current health. Research insurance plans that fit your needs.
2. Planning
Take the information from your discovery work and develop a written plan that factors healthcare costs into your retirement income planning.
3. Implementation
Be a smart healthcare consumer. It's vitally important to get informed, and above all, stay proactive about choosing your healthcare providers.
1. Discovery: Understand your health insurance options
If current trends continue, in just a few years, healthcare will likely be your second largest expense in retirement, more than food.
Medicare is a key part of the equation because it's typically the primary source of health coverage for retirees. However, Medicare only covers about half of your healthcare costs. That means that it's up to you to be able to fund the other half. But before you can assess how to do that, it's important to understand what I like to call the A, B, C, and Ds of Medicare.
Medicare Part A – Hospital Insurance
Helps pay for inpatient hospital care, limited coverage in a skilled nursing facility, and full coverage for eligible home health care and hospice care.
This is the original, basic Medicare coverage, first introduced in 1965. Most people automatically qualify for Hospital Insurance, also known as Medicare Part A, as soon as they reach age 65. It's important to note that the 1983 Social Security Amendments included provisions to raise the full retirement age (FRA) beginning with people born after 1938. If your were born between 1943 - 1954, your FRA is 66. And for those who were born after 1960, FRA moves to age 67.
Since you paid into it through Medicare taxes during your working years, it doesn’t cost you anything.
There is a brief window—three months before you turn 65, the month you turn 65, and three months after you turn 65, for a total of seven months—to enroll in Medicare. This is referred to as the Initial Enrollment Period.
Medicare Part B – Medical Insurance
Helps pay for physicians' services, outpatient hospital services, durable
medical equipment, and other services like physical therapy.
Medicare Part B is a different story. It’s not free. You pay a monthly premium for it that's based on your Modified Adjusted Gross Income (MAGI), and your Social Security income is reduced by your Part B premium.
2015 Medicare Part B premiums based on income
Your Annual Income 2015 Premium
Individual Tax Return Joint Tax Return You Pay
$85,000 or less $170,000 or less $104.90
$85,001 up to $107,000 $170,001 up to $214,000 $146.90
$107,001 up to $160,000 $214,001 up to $320,000 $209.80
$160,001 up to $214,000 $320,001 up to $428,000 $272.70
Over $214,000 Over $428,000 $335.70
Part B Late Enrollment Penalty (clickable)
If you miss this window, your Medicare medical insurance (Part B) and prescription drug coverage (Part D) may cost you more as you can incur penalties. Simply put, if you do not sign up for Part B when first eligible, "your monthly premium for Part B may go up 10% for each full 12-month period that you could have had Part B, but didn't sign up for it," states the Medicare Part B enrollment rules.
While the late enrollment penalty can be very costly for you, a gap in coverage can be financially devastating since there’s no limit on out-of-pocket expenses. This is where private insurance comes into play. Remember, Medicare only covers about half of your healthcare costs.
There are two routes to adding health insurance to basic Medicare:
Medigap policies may be the best choice for people who want to keep their original Medicare Part A & B but want more choice in providers. As the term suggests, Medigap policies fill in coverage gaps. You can choose any doctor or facility you like, but there is a higher premium for this privilege. Because they are unbundled, Medigap policies do not cover prescription drug coverage. You still will need to purchase prescription drug coverage, Medicare Part D, with a Medigap plan.
Medicare Part C – Medicare Advantage plans
Medicare Advantage Plans, also known as Managed Care Plans, are bundled plans. They are designed for people who want an “all-in-one” plan that's similar to an HMO. To enroll in a Part C plan, you need to already have Part A & Part B coverage in place. These plans often include prescription drug plans (Medicare Part D).
Medicare Advantage plans are popular with seniors and were introduced in 2003 as part of the Medicare Modernization Act of 2003; enrollees now represent about 30% of all Medicare beneficiaries.
Medicare Part D – Prescription Drug Plans
While Part C bundled plans commonly offer prescription drug coverage, insurers sell Part D plans separately to those who have Medigap plans or original Medicare. As per Medigap and Part C coverage, you need to keep paying Part B premiums in addition to the premiums for the prescription drug plan you choose in order to keep Part D coverage.
There are many private insurance options available. Although it can be time- consuming to select supplemental coverage, it can make a big difference in your $$ outlay. The good news is that the government’s Medicare site, www.medicare.gov, provides tools that make objective and straightforward coverage comparisons. Once you’re in the Medicare site, select “Find health & drug plans.” The site is user-friendly and can help you compare plans in your state that offer the best value for your unique health-related needs.
It’s important to ask the tough questions to insurers, as well, on how you can keep costs down.
More advice can come from your county's State Health Insurance Assistance Program (SHIP) office at no cost to you. Find your closest one by visiting www.eldercare.gov and typing in your zip code. I was very impressed with the help I received from the Rensselaer County SHIP office when I shopped for new Part D drug plans for my mother in November 2012.
2. Retirement Income Planning: Factor in your healthcare costs
Once you have an idea on the cost of a supplemental plan that best suits your needs, you can model in healthcare spending along with your other retirement expenses. This is an important step often overlooked by financial professionals.
Make sure you factor the appropriate costs and inflation rates into your retirement plan. Healthcare spending is expected to grow at 5.8% annually through 2022.4 Inflation rates for healthcare coverage also vary based on your health. For example, someone with type 2 diabetes could have an inflation rate of 10% annually vs. the 5.8% average. So it’s possible to get a fairly accurate present value of your future healthcare costs.
3. Implementation: Be a smart healthcare consumer
We research cars, electronics, vacation resorts, and countless other retail items prior to purchase, but for some strange reason, we don't conduct the same due diligence for our healthcare needs. It's vitally important to get informed, and above all, stay proactive about choosing your healthcare providers. There's a huge disparity in prices, which means smart decisions can save you a lot of money.
If you identify the best providers for safe and cost-effective solutions before care is needed, you can save a significant amount of time and money later. Start with knowing the types of providers to turn to in different situations:
• Primary care physicians
• A specialist for any existing conditions or special needs
• An urgent care provider
• A full-service hospital
Take the case of someone who breaks his arm. An emergency room visit could run $2,000 or more, while an urgent care facility might cost $250-500 for the very same care.
This brings up another point, especially when you travel during retirement, whether on vacation or to visit friends and family. If you have a Medicare Advantage Part C plan, it doesn’t travel with you, since you're restricted to using in-network providers.
There is some progress being made to partner with out-of-state/out-of-network providers. But for now, if you get sick or injured when you're away from home, you'll have to pay out-of-pocket for the full tab unless you purchase a travel policy.
Bottom line: Do your research before you go on vacation, because it can get very expensive quickly if you don't.
Wherever you are, if you do fall ill, don't hesitate to ask questions about treatment options, because they will have wildly varying costs. If you're facing surgery, for example, investigate whether an outpatient procedure could be a safe, effective, and lower-cost alternative to traditional in-patient surgery. An additional note: carry a copy of your healthcare proxy in your car's glove box or upload it to a secure file in the cloud.
Remember that if you’re paying a larger portion of costs yourself with a high-deductible plan, these decisions have an immediate effect on your healthcare budget.
Also very important: Know what the charges, fees, and out-of-pocket costs you should expect for the recommended treatment plan before you authorize treatment. Healthcare facilities are "for profit" institutions and you shouldn’t be surprised by the cost of your care when you receive your healthcare bill!
Prescriptions also can cost thousands of dollars a year. Don’t assume you’re getting the best price with your plan’s distributor. Costs can vary, and there usually are lower-cost generic brands. (The www.medicare.gov website can help you in this area of comparison.)5 Also know that healthcare costs can vary widely based on geographical region. That may be an important factor in deciding where to retire. Regional costs comparisons can be found on the Centers for Medicare and Medicaid Services website.6
As stated earlier, if current trends continue, healthcare will likely be your second largest expense in retirement. Therefore, covering healthcare expenses is an essential part of retirement income planning. As life expectancies continue to increase, the money set aside for healthcare costs will have to last longer. In a recent Fidelity survey, 9 in 10 people approaching retirement said they were worried about outliving their savings due to the effect of inflation and the cost of medical care.7 By taking the time now to plan for your retirement healthcare expenses, you'll likely have the confidence and peace of mind to manage healthcare costs in retirement.
For more information on resources or an analysis of your healthcare budget based on your personal health needs, please contact our office at info@cwllc.com or 518.677.3781.
Footnotes:
1. Nationwide Survey “Health Care Costs in Retirement.” Consumer study of 801 respondents, 2013.
2. Centers for Medicare & Medicaid Services, National Health Expenditures; Aggregate and Per Capita Amounts, Selected Calendar Years, 1960 -2011.
3. Fidelity Investments, “How to tame retiree health costs," May 2013.
4. “National Health Expenditure Projections, 2012-22: Slow Growth Until Coverage Expands And Economy Improves.” Health Affairs, September 2013.
5. The Patient Protection and Affordable Care Act requires pharmaceutical companies to offer a 50% discount on brand-name drugs that fall into the so-call “donut hole.”
6. Centers for Medicare & Medicaid Services: Total All Payers Per Capita State Estimates by State of Residence 2013, and State Health Expenditure Accounts by Residence Location Highlights, http://www.cms.gov. Percentages were calculated by Fidelity.
7. Fidelity Advisor 2013 Survey of Investors at Retirement, July 2013. Conducted by Research Now on behalf of Fidelity Investments, this survey included 1,886 investors between the ages of 50 and 75 with investable assets of $100,000 or more. Fidelity Investments was not identified as the survey’s sponsor.
