Medicare provides millions of retirees with the financial security of knowing that healthcare costs are less likely to implode their hopes and dreams. Despite its importance, many people don't know much about this long-standing program, which leaves room for many misconceptions about Medicare and its future. Let's debunk three of these myths.
Source: Flickr user Garry Knight.
Myth No. 1: Medicare is free and pays for everything
One of the most common myths is that Medicare offers the same coverage as many retirees enjoyed during their working years.
Although Medicare recipients can cobble together coverage that mimics employer-sponsored health insurance, Medicare Part A only covers certain healthcare costs. Specifically, Medicare Part A pays for in-patient hospitalization or skilled nursing, but only after a deductible has been met, and only if the hospitalization requires staying for "two midnights."
After 60 days in the hospital, patients are required to pay coinsurance bills that can total $315 per day on days 60 through 90. After 90 days, coinsurance climbs to $630 per "lifetime reserve day." Every person has 60 lifetime reserve days, and once those are gone Medicare Part A doesn't pay anything.
The coinsurance amounts are different for skilled nursing facilities, but they also increase over time, and after 100 days Medicare Part A won't pay anything. Part A also pays for some home healthcare and hospice care, but only under certain circumstances.
For more comprehensive care, recipients can turn to Medicare Part B, which covers outpatient healthcare costs, and Medicare Part D, which covers prescription drugs.
Most people are automatically enrolled in Medicare Part B; however, you might have to intentionally enroll if you're coming up on 65 years of age and haven't already signed up for Social Security.
Medicare Part B recipients must pay an annual $147 deductible before coverage kicks in. Typically, patients pay 20% of covered healthcare costs while Medicare Part B picks up the remaining 80%. Importantly, Medicare Part B isn't free. Its cost varies, but premiums range between $104.90 and $335.70 per month.
Medicare Part D plans are optional and are sold by private insurers, so premiums and drug coverage can vary widely from plan to plan. Also, if you're a high income earner, you'll incur an additional payment on top of your monthly Medicare Part D premium. In any case, the base beneficiary premium is $33.13 per month in 2015.
Myth No. 2: Medicare is bankrupt
There are significant worries that the massive number of aging baby boomers will drive Medicare into bankruptcy, but it hasn't happened yet, and it might not happen at all.
Medicare Part A is funded through payroll deductions totaling 2.9% of U.S. workers' income annually, and those payroll deductions go to the Hospital Insurance Trust Fund to pay for healthcare for current Medicare Part A recipients.
Since more workers will retire than join the labor force in the coming decades, and because healthcare costs are increasing faster than inflation, the amount of money in the Hospital Insurance Trust Fund is expected to peak in 2019 and then drop to $124 billion in 2025 from $204 billion today.
That decline is certainly a risk that shouldn't be ignored, but the shortfall likely will ultimately change how Medicare Part A pays for healthcare services or change the payroll tax, rather than become Medicare's undoing.
Additionally, since Medicare Part B and Part D plans are paid for by a mix of premiums and annual federal funding, they are at less risk of ever going "bankrupt."
Myth No. 3: Medicare isn't necessary
Prior to the creation of Medicare in 1965 under Title XVIII of the Social Security Act, roughly 35% of seniors didn't have basic health insurance coverage. That's an unthinkable number of uninsured people, particularly considering that 74 million Americans will by 2015 be covered by Medicare Part A and 67 million Americans by Medicare Part B.
Since baby boomers are living longer, and the costs of healthcare continue to climb, Medicare is likely to remain a critical program that supports a large percentage of our country's GDP while also protecting the financial security of millions of seniors.
Thinking ahead
The fact that Medicare isn't likely to disappear is a good thing for those of us who might be contemplating retirement over the coming decade, but it doesn't mean that we can avoid taking the steps necessary to prepare for future healthcare costs.
Those steps include preparing a retirement plan with a savings target that takes into consideration your personal and family health history, and factoring in the costs associated with Part B and Part D coverage, deductibles, and potential out-of-pocket healthcare expenses when you're crafting your retirement budget. Realistically, planning for the likely bumps and bruises ahead could go a long way toward making sure your retirement plans aren't derailed by an illness or disease, regardless of Medicare's future.
