Many people considering retirement base their decision on their eligibility for Medicare coverage to pay for any medical expenses they incur. As the first part of this article discussed, Medicare offers a wide array of benefits that help seniors pay for their medical care. Although there are costs involved in participating in Medicare, they often pale in comparison with the premiums that people younger than 65 have to pay for private health insurance coverage, which is usually inferior to Medicare coverage. As you'll see, various charges may apply for each part of your Medicare coverage.
Paying early in life
One thing to remember about Medicare coverage is that you've probably been paying for coverage throughout your working career. When you get your paycheck, some of the money that's withheld goes toward Medicare costs. The current withholding amount for employees is 1.45%, and your employer matches that amount. If you're self-employed, then you have to pay 2.9% to cover both parts. Unlike Social Security withholding, which has a maximum wage amount upon which withholding taxes are imposed, Medicare withholding never stops. For instance, if you make $250,000 each year, you'll pay 6.2% in Social Security withholding only on your first $97,500, for a total amount of $6,045. However, you'll pay 1.45% on your full income for Medicare withholding, to bring the total to $3,625.
For the vast majority of seniors, contributing Medicare withholding taxes over the course of their working lives pays off with free coverage under Medicare Part A. To determine eligibility, Medicare looks at the number of quarters that you or your spouse worked and had Medicare taxes withheld from your paycheck. If Medicare finds withholding during at least 40 different calendar quarters, then you'll receive your Part A benefits at no additional cost. On the other hand, if you don't have a long work history and therefore don't have enough qualifying calendar quarters to be eligible for free Part A coverage, the premiums you'll have to pay may be substantial. In 2007, you may have to pay as much as $410 per month for Medicare Part A.
Paying as you go
For coverage under Medicare Part B, you'll have to pay a monthly premium. The base premium is $93.50 per month. For the first time, Part B premiums in 2007 will be adjusted for seniors who have income above certain limits. Single people with income above $80,000 and married couples with income above $160,000 may have to pay higher premiums. The fees will range from $105.80 to as high as $161.40 for singles making $200,000 or couples making $400,000 or more. In addition, you may have to pay a higher premium if you don't sign up for Part B when you initially become eligible.
On the other hand, if you have a limited income, you may qualify for a reduced premium for Part B. Medicare Savings Programs assist low-income seniors with little or no financial resources. This assistance is usually offered in conjunction with state Medicaid programs.
Similarly, those who use Medicare Advantage Plans under Part C can expect to pay monthly premiums in addition to the Part B cost. In some cases, these premiums may be substantial, especially if your particular plan includes enhanced medical benefits and prescription-drug coverage. As an example, Humana (NYSE: HUM) offers several levels of benefits to residents of some states. Some levels require no additional premium, while others necessitate up to $129 per month in additional payments. Those who choose a prescription-drug plan under Medicare Part D will also pay separate premiums that vary depending on the provider and the benefits that the plan offers.
Deductibles and co-payments
In addition to premiums, Medicare coverage includes a number of co-payments and deductibles for certain items. Part A has a deductible that patients must pay from their own funds before Medicare benefits kick in. For example, if you have to stay in a hospital, you will have to pay a total of $992 for the first 60 days. The same amount applies whether you stay for six days or six weeks. For stays longer than 60 days, Part A also requires a co-payment for each additional day. For instance, a 90-day hospital stay would add $7,440 to your bill. Similarly, stays of 20 or fewer days in skilled-nursing facilities involve no co-payment, but patients must pay $124 per day for the next 80 days.
Part B coverage has a two-tiered system that is similar to many private health insurance plans. Each year, you must first pay the deductible for Part B expenses; in 2007, this amount is $131. After you've paid the deductible, Medicare covers 80% of the amount it approves as appropriate for the health care you've received; you are responsible for paying the remaining 20% of the cost.
The deductibles and co-payments for Medicare Advantage Plans and prescription-drug plans can vary greatly between particular plans. As a previous article on Medicare Part D discussed, a thorough examination of such plans is necessary for understanding the costs and to make a good decision about which plan to choose.
In many ways, the benefits of Medicare and the cost structure it uses resemble those of private health insurance plans. As with private insurance, Medicare takes action to ensure that the medical expenses it covers are legitimate and appropriate for the services being provided. While this often produces savings, it can also leave seniors in an uncomfortable situation if they find their benefits being declined. The third part of this article looks at the Medicare claims process in more detail.
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Fool contributor Dan Caplinger isn't anywhere close to getting Medicare, but he's had plenty of experience with those who do. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy is there for you both before and after you turn 65.
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