Medicare does a good job of helping retirees handle the financial burden of getting the healthcare they need. However, there are aspects of the Medicare program that can be costly if you don't know about them and find ways to get around them. Below, we'll look at several areas in which not knowing the basics of Medicare can cost you.
Challenge: Having to pay for hospital coverage under Medicare Part A.
Most people get premium-free coverage for their hospital expenses under Medicare Part A. However, if you don't meet the qualification requirements, then you can have to pay sizable premiums out of pocket. For 2016, the maximum Part A premium is $411 per month.
In order to avoid having pay that premium, either you or your spouse must accumulate enough program credits to get full Part A coverage. To eliminate the premium entirely, you'll need 40 credits, which is generally equivalent to 10 years of work paying payroll taxes under Medicare. Those with 30 to 39 credits, which equates to roughly 7.5 to 10 years of qualifying work, pay a reduced premium of $226 per month.
Challenge: Having to pay extra for medical coverage under Medicare Part B.
For most people, Medicare Part B premiums are based on the amounts set by the Centers for Medicare and Medicaid Services each year. In 2016, the baseline amount is $121.80 per month, although many recipients pay a lower $104.90 monthly amount because of special provisions that kicked in when Social Security didn't give recipients a cost of living increase for 2016.
However, high-income earners have to pay surcharges above and beyond their baseline amount. The chart below gives the details, and as you can see, high-income individuals can end up paying as much as $268 per month more for their Part B coverage than others.
The income amounts on which the higher premium are based come from your tax return from two years before, so it's your 2014 income that determines your 2016 premiums. There's little you can do about past income now, but keeping current and future income levels in mind might help you reduce the cost of your Part B coverage.
Challenge: Having to pay penalties on Medicare premiums.
It's important to sign up for Medicare in a timely fashion, or else you can end up having to pay penalties that boost your overall costs. The types of penalties involved vary by type of coverage:
- Part A charges a penalty of 10%, lasting one year for every two years you waited before getting coverage. The penalty only applies to those who have to pay for Part A coverage.
- Part B charges a permanent penalty of 10% times the number of years you waited before getting coverage, adding the penalty to what you owe on your monthly premium.
- Part D prescription drug coverage charges a penalty of 1% times the corresponding base premium rate for every month that you didn't have appropriate coverage.
The solution to avoiding penalties is to sign up for Medicare on time. The initial enrollment period for most people begins around age 65, starting three months before your 65th birthday and extending for three months after it. Special enrollment periods can also apply if you have qualifying healthcare coverage when you hit 65. Taking advantage of either of those enrollment periods will avoid penalties and save you money.
Challenge: Medicare doesn't cover all of your healthcare costs.
Even when you set it up correctly, Medicare only reimburses a portion of your total healthcare costs. For many services, Medicare provides only 80% coverage, leaving you to pay the remaining 20%. In addition, deductibles and other coinsurance requirements apply to most services. For example, hospital coverage requires that you pay a $1,288 deductible before coverage kicks in. Drug plans have similar deductibles, and you'll often have to pay extra amounts as copayments for doctor visits and prescriptions. Traditional Medicare doesn't have any out-of-pocket maximum, leaving your potential liability unlimited.
To get broader coverage, a Medigap supplemental policy can be the answer. In exchange for an additional monthly premium, Medigap policies pay for some of the things that traditional Medicare doesn't, making it beneficial to run a cost-benefit analysis to see whether it makes sense for you. For others, choosing Medicare Advantage plans rather than traditional Medicare can be a better solution. Medicare Advantage incorporates supplemental provisions into a single package provided by private insurance companies, and plans under Medicare Advantage can offer attractive features that you'd otherwise need a supplemental policy to get.
Medicare's value for retirees is huge, but even so, there are still considerable costs associated with the program. By staying aware of potential expenses, you can take steps to reduce or eliminate them before it's too late.