Retired seniors face perhaps the most challenging circumstances among any of us in dealing with financial planning. They generally have earned as much money as they're going to earn in their lifetimes, and so they face the daunting task of making sure that whatever they have saved during their careers will last throughout the remainder of their lives. Even those who have prepared for retirement along the way by getting debt paid off, accumulating savings for post-retirement living expenses, and investing successfully still have to deal with the uncertainty of unanticipated costs that may threaten the viability of their financial plans.
Health-care expenses represent one of the most unpredictable types of expenses that all seniors have to face. These costs have risen at rates far in excess of inflation, which is what governs cost-of-living adjustments to government benefits such as Social Security. Even though Medicare has traditionally covered many health-care expenses, it hasn't always covered some other major categories of concern to seniors -- nursing-home and similar long-term care expenses, and prescription drugs.
These two groups of expenses have very different characteristics. Not every senior will need long-term care, but those who do will face huge expenses that can wipe out a person's life savings in short order. Prescription drugs, however, are in much wider demand among seniors, and while the cost of drugs doesn't necessarily amount to tens or hundreds of thousands of dollars per year, prescription costs do add up to a significant amount of total expenses for the elderly.
Medicare Part D
In response to this need, President Bush signed a bill establishing prescription-drug coverage under Medicare, under what's now known as Medicare Part D. Although the details are complicated and have confused many seniors, the basics of the plan are relatively simple: Under Medicare Part D, seniors may choose from a variety of prescription-drug plans that various providers offer. Most of these providers charge a premium for their plans that seniors must pay, usually on a monthly or annual basis. The plans available to seniors vary greatly in the amount the plans will pay for prescription drugs, the specific drugs the plan provides, and the amounts that seniors must be prepared to pay on their own. Adding to the complexity and confusion, different plans are available in different states, and a plan that is available to residents of one state may not be an option for residents of another state. Some states have offered more than a dozen different plans to their residents.
The combination of the wide variety of choices and the difficulty in understanding and analyzing the various plans has caused confusion and near panic among many seniors. Faced with deadlines for making choices and threatened by substantial surcharges for changing their minds after the deadline, seniors in some cases had to make an educated guess at which plan would best serve them. Even though Medicare has tried to help provide information about prescription drug coverage, the decisions will continue to be difficult.
Picking a plan
The main goal for a senior considering prescription-drug coverage is to pick the plan that will maximize the amount of benefits covered and minimize the premiums the senior has to pay. This is an impossible task, because no one can know what prescription drugs they may need in the future, and as a result, no one can anticipate which plan will cover those new drugs. However, most seniors can at least look at the prescription drugs they currently need and then determine which plan available to them will lead to the lowest possible out-of-pocket cost, keeping in mind copayments and deductibles under the plan, as well as the cost of premiums.
Consider this example. Assume that you are a senior who currently takes one prescription drug. Drug A costs you $50 per month. You've been seeing your doctor on a regular basis, and you've discussed the possibility of needing to add a second prescription drug. Drug B would cost $200 per month. But because of certain side effects with Drug B, your doctor is reluctant to start you on it until it's absolutely necessary for your overall health.
In this example, say that you live in a state that offers two health plans. Plan 1 is available for an annual premium of $30. It has no deductible and covers Drug A with a copayment of $20 per monthly supply. But Plan 1 does not cover Drug B. Plan 2, meanwhile, has an annual premium of $250, a deductible of $100, and copayments of $25 per monthly supply. It covers both drugs.
Looking solely at your current situation, it's pretty easy to see that Plan 1 is the better choice. Currently, you pay $600 per year for your total prescriptions. Under Plan 1, you would pay your $30 annual premium plus 12 copayments of $20 for a total of $270. Plan 1 would save you more than half of what you're currently paying for your prescriptions. Plan 2, on the other hand, would cost $250 for the annual premium, $100 for the first two months to meet your deductible, and 10 copayments of $25 for a total of $600. Notice that as long as you're using only Drug A, the cost of Plan 2 offers no savings on what you're paying currently for your prescriptions.
But what if you eventually need to take Drug B? Read on to see how this decision becomes more complicated:
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