So, you are newly retired and are just now getting used to all of the changes attending that major life event. On the other hand, perhaps you can see retirement rapidly approaching and are making sure you have all of your ducks in a row for a smooth transition from working to whatever comes next. Either way, congratulations.
In the midst of reviewing your investment strategy and updating your estate planning legal documents, don’t neglect to plan for the brave new world of health care in retirement. It can get rather complicated. For starters, you will need to become conversant in a whole new “alphabet soup” that is Medicare. Along the way, you should know the essential difference between Medicare and Medicaid when it comes to long-term care planning.
Each of us is most vulnerable about important matters in life when we don’t know what we don’t know. And understanding how health care coverage works in retirement is one of those areas of vulnerability. Once you do know what you didn’t know, then you can make some intelligent, informed decisions.
What is Medicare? It is a government run health insurance program for Americans age 65 and older, as well as certain disabled younger Americans. The Social Security Administration funds Medicare through a Medicare tax extracted from the earnings of taxpayers. Unlike the extractions taken from your income to fund the Social Security System, there is no ceiling on the amount of income subject to the Medicare tax.
Medicare: Alphabet Soup
The primary letters you must know in the Medicare “alphabet” are Medicare Part A and Part B. Why? They will form the foundation of your health insurance with limited exceptions. When you think of Part A, think of a hospital stay. There are no premiums to pay for hospitalization coverage, if you paid into Social Security for at least 10 years. For 2015, the Part A premium for those who fall short of the 10 years required is $407 per month. Either way, you are responsible for out-of-pocket deductibles and co-pays if you are hospitalized.
When you think of Part B, think of physical therapy, as well as doctor visits and related “outpatient” expenses. Unlike Part A, everyone pays a “base” premium for Part B coverage. In fact, depending on your adjusted gross income, you may be socked with a supplemental premium adding at least 40 percent to your base premium.
After Part A and Part B, you may elect coverage under Part C or Part D, or both. However, if you elect coverage under Part C, then you will be precluded from coverage under “Medigap” policies A through L. Are you confused yet?
Part C is known as “Medicare Advantage” and is part private plan and part Medicare. Basically, as a Medicare eligible retiree, you can choose to get your Medicare Part A and Part B coverage through a private insurer instead of Original Medicare. By law, Part C coverage must be “equivalent” to Part A and Part B coverage, but some offer extras like prescription drug coverage.
Part D is limited solely to prescription drug coverage and is only available through a private plan. Watch out! You cannot have a Part C Medicare Advantage plan with prescription coverage under Part D. If you do, then you will be disenrolled in Part C and dropped back to Original Medicare. Also, beware of the infamous Part D “donut-hole” window. After you reach your plan deductible, you will have no coverage when your annual prescription costs reach $2,380 and again until they exceed $4,550.
Medigap Policies: A to L
What if you want insurance to fill in “gaps” not covered in Medicare Part A and Part B? For example, you may be tired of annual co-pays and deductibles. If yes, then you might want to consider one of 12 “Medigap” policies. Except for three states at present (i.e., Massachusetts, Minnesota and Wisconsin), plan coverages are uniform even though the policies may be offered by different private plans.
Basically, here is how Medigap policies vary, kind of like buying an automobile. Medigap A is basic transportation. As you move up through the Medigap “alphabet” more bells and whistles are added, like air conditioning, sunroof, leather seats and a concert quality sound system. Warning: As with Medicare Part C and Part D, you can only have Part C or Medigap, but not both. Medicare or Medicaid?
Are you banking on Medicare to pay for your chronic long-term care needs, like the everyday “activities of daily living” (e.g., bathing, dressing, feeding, transferring, toileting, etc.)? If yes, then think again. Medicare only pays for short-term care when rehabilitation is needed – like to help get you back on your feet after hip surgery. And Medicare only pays a limited amount for a limited period of time. Long-term care insurance pays for chronic care needs for the activities of daily living.
Medicaid, on the other hand, is the primary long-term care payor for people age 65 and older who have limited financial resources. The program is jointly run by the federal government and each state’s government – and may even be referred to by an alternative name from state to state. Because eligibility requirements are very strict and are means-tested, appropriate legal counsel is essential.
Understand your retirement health insurance options, so you can have greater peace of mind in your golden years.