10 Fundamental Facts About Medicare

October 13, 2020

If you are approaching the age of Medicare eligibility (generally, age 65), you probably have lots of questions about how the program works. The sooner you get answers to your questions, the sooner you can start planning and budgeting — because Medicare coverage is not free. Indeed, if you fail to sign up during your eligibility period, you could incur penalties. So, to get started on your Medicare journey, here are answers to 10 frequently asked questions about Medicare insurance.

1. Where does the money come from to provide Medicare benefits?

Actually, you and your employer provide the bulk of the money. Employees and employers each pay 1.45% of the worker’s wages into the Medicare system, or 2.9% total. Self-employed workers pay 2.9% of their income. Employers are responsible for withholding an additional 0.9% on an individual’s wages paid in excess of $200,000 in a calendar year, without regard to filing status.

Despite these deductions, the money is not enough to sustain the program. There are other participant premiums you are responsible for, which we discuss shortly.

2. Who can receive Medicare?

Medicare is the federal health insurance program for people 65 or older. However, younger people with qualifying disabilities can also qualify. These individuals must have received Social Security Disability benefits for 24 months or have certain diagnoses, including end-stage renal disease (ESRD) or amyotrophic lateral sclerosis (ALS, also known as Lou Gehrig’s disease).

3. What does Medicare cover?

The different parts of Medicare — Parts A, B, and D — help cover specific healthcare services:

Medicare Part A (Hospital Insurance) covers inpatient hospital stays, care in a skilled nursing facility, hospice care, and some home health care.

Medicare Part B (Medical Insurance) covers certain doctors’ services, outpatient care, medical supplies, and preventive services.

Medicare Part D (Prescription Drug Coverage) helps cover the cost of prescription drugs (including many recommended shots or vaccines).

Services and benefits are not unlimited, however. Nor are they all premium free. In fact, Medicare only covers 80% of eligible medical expenses. You will have to pay the difference out of pocket or purchase additional insurance to fill this gap. Here’s your motivation: the average cost of heart bypass surgery, the most common heart surgery in the United States, is $40,000.1 Your portion of the bill would be $8,000.

4. How do you enroll in Medicare?

If you are already taking Social Security benefits, you will be automatically enrolled in Parts A and B. You can choose to turn down Part B, since it has a monthly cost (more about this in a minute). If you keep it, the cost will be deducted from Social Security if you already claimed benefits.

If you have not started Social Security, you will have to sign up for Parts A and B. You have a seven-month enrollment window to do this (three months before the month you turn 65, plus your birth month, plus three months after your birth month). To ensure coverage starts by the time you turn 65, sign up in the first three months.

If you are still working and have health insurance through your employer (or if you’re covered by your working spouse’s employer coverage), you may be able to delay signing up for Medicare. But you will need to follow the rules and sign up for Medicare within eight months of losing your employer’s coverage, to avoid significant penalties when you do eventually enroll.

If you miss the initial enrollment window, you will pay a delayed enrollment penalty of 10% per year for each year you were eligible but failed to enroll.

Imagine waiting until you are 68. That three-year delay will cost you an extra 30% of the standard Medicare B every month you are enrolled in Medicare. So, on top of the Standard B premium of $144.60 a month, you would pay a penalty of $43.38, making a total monthly premium of $187.98.  There is also a 1% per month delayed enrollment penalty for Medicare prescription drug (Part D) plans. When it comes to your Medicare eligibility, don’t procrastinate.

5. Is any part of Medicare free? Do you have to pay a premium for each Medicare part (A, B, D) in which you enroll?

Let’s look at each part:

Part A (Hospital Insurance). Most people don’t pay premiums for Part A. If you have paid Medicare taxes for 10 or more years while working, you are eligible for Part A at no cost. People ineligible for free Part A can pay a monthly premium to participate. Although you may not pay premiums for Part A coverage, you may still be responsible for deductibles, co-insurance, and co-payments.

Part B (Medical Insurance). Everyone enrolled in Part B pays a premium! The standard Part B premium amount in 2020 is $144.60. Most people pay the standard Part B premium amount. If your modified adjusted gross income — as reported on your IRS tax return from two years ago — is above a certain amount, you’ll pay the standard premium amount and an Income-Related Monthly Adjustment Amount (IRMAA). If you earned more than $500,000 (joint tax return of $750,000) two years ago (the highest Medicare bracket), you will pay $491.60 a month (the highest amount you can pay in 2020).

Part D (Prescription Drug Coverage). Medicare doesn’t necessarily pay for the cost of your drugs. Rather it covers or subsidizes their cost. To receive these under-market prices, you have to be enrolled in a drug prescription plan that Medicare honors. There are 1,439 stand-alone Medicare Part D prescription drug plans in the U.S. in 2020, which have an average monthly premium running about $35.

However, you’re not required to enroll in a Medicare Part D Prescription Drug Plan. But if you go without creditable prescription drug coverage for 63 or more days in a row after you’re first eligible, you may have to pay a late-enrollment penalty. You can avoid this penalty if you show you have “creditable” coverage from another source, such as drug coverage from an employer or retiree health insurance plan.

Signing up for Part D coverage follows the same protocol as signing up for Part B. You can sign up three months before you turn 65 or three months after.

6. If Medicare provides only 80% coverage, how do you fill or at least close this gap?

There are two ways. You can sign up for a supplement, commonly called Medigap, to supplement your original Medicare (Parts A and B), or you can sign up for a Medicare Advantage plan.

The biggest difference between the Medigap and Medicare Advantage pertains to cost. Generally, Medigap plans have higher premiums. However, Medicare Advantage plans usually come with more copays, potentially resulting in more out-of-pocket expenses. Your access to doctors, specialists, and hospitals is also more limited. With Medigap, you can see almost any medical professional you like, anywhere you like, without a referral.

In addition to having lower premiums, Medicare Advantage plans typically provide broader benefits such as vision, dental, prescription drug, and wellness care (think free gym membership).

The downside is Advantage plans don’t travel well. For example, if you’re enrolled in a Medicare Advantage plan and are moving outside your plan’s service area (either to a new address in your state, the next county over or a new state altogether), you will need to enroll in a plan within your new service area.

Another negative is those copays. For example, you might have a $10 copay at the primary care physician’s office and perhaps $40 for a specialist. If you visit lots of doctors, these copays add up.

Of course, copays are likely to cost you less in the long run than paying Medigap’s monthly premiums. Medigap also doesn’t include prescription drug coverage, so you will have to purchase a plan separately. Here’s a summary of what each plan covers. By the way, Medicare Advantage is also known as Part C.

7. What doesn’t Medicare cover?

Medicare is designed to provide hospital, medical, and rehabilitative care, such as physical therapy to help you walk again after a hip or knee replacement. It is not designed to provide custodial care — that is, the kind of long-term care you might require to assist you with activities of daily living, such as dressing, bathing, and toileting. To cover those costs, you will have to rely on your savings, long-term care insurance, or Medicaid.

Medicare is designed to provide hospital, medical, and rehabilitative care, such as physical therapy to help you walk again after a hip or knee replacement. It is not designed to provide custodial care — that is, the kind of long-term care you might require to assist you with activities of daily living, such as dressing, bathing, and toileting. To cover those costs, you will have to rely on your savings, long-term care insurance, or Medicaid.

Traditional Medicare also doesn’t cover routine dental, hearing, or vision care. Selecting a Medicare Advantage plan may provide these additional services.

8. Does Medicare cover you if you are traveling outside the United States?

In most situations, Medicare won’t pay for health care or supplies received outside the United States (the 50 U.S. states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands). Medicare supplement insurance (Medigap) policies may cover you when you travel outside the U.S.

9. Can you still contribute to a Health Savings Account (HSA) if you are on Medicare?

No. However, you are not barred from taking withdrawals from an existing HSA to pay for qualified healthcare expenses, including deductibles, coinsurance payments, or prescription copays.

10. What resources are available for further Medicare assistance?

The State Health Insurance Assistance Programs (SHIPs) provide free local, in-depth, and objective insurance counseling and assistance to Medicare-eligible individuals, their families, and caregivers. Call 1-877-839-2675 or visit https://www.shiptacenter.org/.

How will you pay for Medicare Part B, for which all Medicare enrollees are responsible for paying? How will you pay for Medigap or a Medicare Advantage plan to fill in Medicare’s coverage gaps? These are questions to address before you become Medicare eligible. One financial solution, if you are 62 or older and have substantial equity in a home that you own and live in as your primary residence, is a reverse mortgage. One of six payout plans could help you pay not only your Medicare premiums, but also copays and deductibles. A reverse mortgage could also help fund a long-term care policy. For more information about using home equity to help you retire better, reach out to your reverse mortgage professional.

FAQs

Is Medicare free?

The hospitalization portion (Part A) is usually free, if you have paid Medicare taxes for 10 or more years while working. The medical portion (Part B), however, requires all enrollees to pay a monthly premium. The standard premium in 2020 is $144.60. As for prescription drug coverage (Part D), Medicare will pay part of the costs for everyone who enrolls in a plan. Because Medicare generally pays for only 80% of your healthcare costs, many Medicare enrollees purchase supplemental plans (Medigap or Medicare Advantage) to fill in the gap in coverage.

Does Medicare cover nursing home stays?

Medicare doesn’t cover custodial care, if it’s the only care you need. Most nursing home care is custodial care. Custodial care helps you with activities of daily living (like bathing, dressing, using the bathroom, and eating) or personal needs that can be done safely and reasonably without professional skills or training. Medicare Part A (Hospital Insurance) may cover care in a certified skilled nursing facility (SNF). It must be medically necessary for you to have skilled nursing care.

Sources:

1 https://www.healthgrades.com/right-care/tests-and-procedures/the-10-most-common-surgeries-in-the-u-s


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