Medicare basics and the Affordable Care Act
Healthcare can be a substantial expense in retirement, but you can reduce your costs by buying the right coverage. Although Medicare will help you with hospitalization costs and doctors’ visits, you’ll probably need supplemental coverage. You’ll also need to buy individual coverage if you retire before turning 65 and health insurance is not available through your former employer.
If you’re considering retiring before you turn 65, as a result of the Affordable Care Act, you now have an additional option to obtain coverage through the Health Insurance Marketplace. Plan benefits vary and costs depend on your family size and family income. Factors to consider in choosing a plan include premiums, deductibles, co-pays, coinsurance and the annual out-of-pocket limit.
The Medicare program is comprised of four parts: Part A, Part B, Part C (also known as Medicare Advantage), and Part D. Together, these four parts provide coverage for basic medical services and presubscription drugs. There’s a detailed description of these plans at the Medicare site, www.medicare.gov.
- Medicare Part A (hospital insurance) and Part B (medical insurance) cover doctor visits, hospital services, and outpatient care. For this coverage, you can go to any doctor or hospital that accepts Medicare.
Medicare generally helps cover the cost of hospitalizations. But you’ll pay a $1,216 deductible for every hospital admission (unless it has been less than 60 days since your last stay). And you’ll pay a monthly premium and co-payments for medical services such as doctors’ visits.
The Affordable Care Act has expanded coverage for preventative care services. Screenings such as mammograms, colonoscopies and tests for diabetes, high blood pressure and high cholesterol are now free.
In 2014, most new enrollees will pay a premium of $104.90 a month and a 20% co-payment after reaching the $147 annual deductible for Part B coverage. Most individuals do not pay a premium for Part B. Premiums for 2014 are based on 2012 Modified Adjusted Gross Income (MAGI) and people with higher incomes (household income over $170,000) will pay higher premiums on a sliding scale with a maximum premium of $335.70. Most individuals do not pay a premium for Part A.
- Medicare Part C or Medicare Advantage is a private insurance plan that provides you with all of Part A and Part B benefits. Medicare Advantage plans, such as Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs) are offered by private insurers that receive payment from the government to provide Medicare benefits. In addition, to providing Part A and Part B benefits, many offer additional coverage, including prescription drug, vision and dental coverage.
Factors to consider when choosing between Medicare Part A and Part B (or Original Medicare) and a Medicare Advantage plan include cost, access to medical providers and need for prior authorization for services.
The monthly premium for Medicare Advantage varies widely depending on your state and the private insurer you choose, as well as whether you choose an HMO or PPO for your coverage.
In 2014, the average weighted monthly premium for Medicare Advantage prescription drug plans will be $39, according to the Kaiser Family Foundation1.
- Medicare Part D is prescription drug coverage and can be obtained through a Medicare Prescription Drug Plan or a Medicare Advantage Plan that includes drug coverage. These plans are administered by private insurance plans. Different Part D plans cover different drugs so it’s important to review what’s covered before choosing a plan. If you need a drug not covered by your plan, you’re on the hook for its cost.
The “doughnut hole” is the Medicare prescription drug coverage gap that you have to fill with your own money. In 2014, each Medicare Part D covers up to $2,970 for medicines for one year. This amount includes what you pay as well as what your insurance pays. Once you exceed $2,970 limit, your prescription benefits decrease – that’s when you are in the so-called donut hole. You must pay the full cost of the drugs until your total out-of-pocket cost reaches $4,750.
Under the Affordable Care Act, you can save money on brand-name drugs when you’re in the donut hole. You’ll get a 50% discount on brand-name Part D-covered drugs. The discount will be applied automatically at your pharmacy. Additionally, each year from now until 2020 the percentage you pay during this coverage gap will decrease with the donut hole ultimately eliminated in 2020. At that point, you will pay 25% for all prescriptions.
Medigap is Medicare supplement insurance sold by private insurance companies that can help pay for services and procedures not covered by Medicare Parts A and B. You must already have Medicare Part A and Part B in order to purchase a Medigap policy and will pay a separate premium – in addition to the monthly premium for Part B that you pay to Medicare.
A Medigap policy is different from a Medicare Advantage Plan. A Medicare Advantage Plan is a way to access Medicare benefits while a Medigap policy only supplements Medicare Benefits. You’re unlikely to need Medigap insurance if you go with a Medicare Advantage plan instead. The federal government publishes an excellent guide to Medigap plans.
One of the major obstacles to retiring before 65 is finding affordable health insurance. Unless you’re lucky enough to have health insurance as a benefit from your former employer, you will have to purchase your own coverage.
As a result of the Affordable Care Act, you can now use the Health Insurance Marketplace to buy a plan that meets your needs. Depending on your income and family size, you may be able to get lower costs on your monthly premiums and out-of-pocket costs. The lower your income, the lower your costs. However, you generally won’t qualify for financial assistance if your estimated 2014 income is above:
- $45,960 for an individual
- $94,200 for a family of four
If you don’t have any health coverage in 2014, you may have to pay a fee. For the 2014 tax year, the penalty is $95 for each adult and $47.50 for each child. The fine won't be any more than $285 per family, or 1% of your income, whichever is more. Fines will cost you a lot more in 2015 and 2016.
More information on the Affordable Care Act is available at www.healthcare.gov.
Long-term care insurance pays the cost of nursing home, home-health care, and assisted living expenses. If you want this coverage, it’s best to buy it in your 50s or early 60s, when it might cost less than $2,000 a year. After that, it may be too expensive.
When shopping for a long-term care insurance policy, look for one with an annual cost of living adjustment. That will help protect you against rising health care expenses in retirement.
Also be sure the insurer has an excellent financial-soundness rating from Moody’s or Standard & Poors. You want to be confident the insurer will still be in business when you may need the policy.