A Primer on Medicare

11/14/2022 - By Mark Hemby, CFA

Healthcare is one of the most important expenses to consider as individuals approach retirement. In the U.S., any citizen over the age of 65 is eligible to receive Medicare benefits. Just like Social Security, Medicare funding happens directly through your paycheck. Though most of us have been contributing to Medicare since our first job, it’s not a program we think much about until we approach retirement. In this article, we’ll discuss Medicare at a high level, and answer some of the most common questions surrounding the program. Questions like, “What are the basics of the coverage?  What are the extras many retirees add to the basic coverage? What are some important factors to consider as you approach retirement?”

Part A (Hospital Insurance) – This is basic hospitalization insurance. There is no premium; you’ve been paying for it most of your life.  It helps cover inpatient care, skilled nursing, hospice and home health care. It is important to remember that it may not cover all expenses related to these types of care. That gap can be covered by supplemental insurance, as outlined below.

Part B (Medical Insurance) – This coverage is best described as basic medical insurance. For instance, it covers services like doctor’s appointments, outpatient care, durable medical equipment, as well as preventive care like shots, vaccines, and ‘wellness’ visits. There is a monthly premium for Part B. In 2022, the monthly premium was $170, and it is typically deducted from your Social Security check (if you’re currently taking Social Security). Part B only covers up to 80% of these expenses after the deductible is met (the deductible was $233 for 2022).  Additionally, there is no yearly limit to what you pay out of pocket. There can be significant gaps with both Part A and Part B coverage, and supplemental or Medigap insurance is designed to fill those gaps.

Medicare Supplement Insurance (Medigap) – Original Medicare pays for some, but not all of your medical expenses. Private insurers offer supplemental policies that help cover these ‘gaps’ in coverage.  Medigap plans are standardized and in most states are referred to as A – D, G, and K – N.  Click here for more details.  

Other important considerations with Medigap insurance that you should know are:

  • You must have Part A and Part B plans before you purchase Supplemental Insurance.
  • You pay a private insurance company a premium in addition to your basic Part B premium.
  • Medigap policies only cover one person. If you’re married, each of you needs a policy.
  • Plans can vary greatly. You must consider all details before you make a choice.

Part D (Drug Coverage) – Part D is another optional coverage in addition to Medigap and it covers prescription drug costs. Like Medigap plans, Part D plans are sold by private insurance companies.  Importantly, they can vary greatly in what and how much is covered, and there can be penalties if you do not take Part D. Check with a Medicare specialist for more details.

Part C (Medicare Advantage) – An alternative to Supplemental Insurance is Medicare Advantage.  Medicare Advantage is a Medicare-approved plan sold by private insurance companies. You cannot have both a Medicare Advantage Policy and a Medigap policy. When you first become eligible for Medicare, there are two main ways to get coverage:

  1. Original Medicare
    • Includes Part A and Part B.
    • Optional Part D and Medigap.
  2. Medicare Advantage
    • Bundles Part A, Part B and usually Part D.
    • Often requires ‘in-network’ providers (doctors, drugs, etc.)
    • May have lower out-of-pocket costs than Original Medicare.
    • Can offer extra benefits like vision, hearing, and dental coverage.

There are several differences between these two options, but a couple of important ones are:

  • With Original Medicare, you can go to any hospital or doctor in the U.S. that accepts Medicare. With Medicare Advantage, you can only use doctors or other providers within the plan network.
  • With Original Medicare, in most cases, you don’t need a referral to see a specialist. With Medicare Advantage, you may need a referral to see a specialist.

The cost of each of these options can vary significantly. Original Medicare requires a premium for Part B that covers 80% of medically necessary expenses. If you choose Part D and/or a Medigap plan they both require premiums. With Original Medicare, there is no yearly out-of-pocket maximum.  Medicare Advantage Plans vary in cost. You must pay the Part B premium but there may not be a premium for other coverages. Something important to note is that these plans have a yearly limit on what you pay. With a Medicare Advantage plan, you do not need to purchase supplemental insurance.

One common challenge retirees and financial planners face is navigating some of the income challenges that come when drawing income from retirement accounts. Many retirees see a drop in taxable income the first few years of retirement but are then forced to start taking Required Minimum Distributions in later years. This added taxable income can impact Medicare premiums. The Income-Related Monthly Adjustment Amount (IRMAA) is a surcharge to Part B and Part D premiums and applies to retirees in higher income brackets. The IRS uses a 2-year look back to determine if you will incur the surcharge. As of 2022, married taxpayers filing jointly with a yearly income of more than $182,000 can be affected. While the added surcharge is typically not a steep cost, it is still important to note. Consult with your tax professional and your health insurance provider for details.

As you approach retirement, medical insurance can be a significant expense. Consult with a qualified Medicare specialist before making any decisions. At Saltmarsh, our financial advisors are here to help guide you through this decision, as well as other decisions you make in this next phase of life.

About the Author | Mark Hemby, CFA®

Mark is a financial advisor for Saltmarsh Financial Advisors, LLC, an affiliate of Saltmarsh, Cleaveland & Gund. He holds a Chartered Financial Analyst (CFA®) designation and as part of our investment advisory group, he works with clients to develop and implement investment strategies to achieve financial freedom while also ensuring their goals and objectives are aligned. Mark has over 15 years of experience in investment banking working with individuals and organizations to manage their portfolios and coordinate investment activities. In addition to his experience with fixed-income trading and sales, Mark owned and operated his own business in Alabama.

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