Medicare: What Every Boomer Must Know

By:  Lori Eason, CFP(R)

According to recent studies, an alarming percent of the population has no clue how Medicare works, how much it costs or what health care costs it covers. 56% of pre-Medicare boomers age 47-64 have a poor understanding or know nothing about Medicare costs and benefits. We all know that health care costs are out of control in this country. Unless you have your head buried in the sand, you have also realized that as the population ages, Medicare in its current form is simply not sustainable. I'll save that topic for another day and shift today's focus to 5 important facts everyone needs to know about Medicare.

Medicare Part A is mandatory.

Most people are aware that at age 65, you are eligible for Medicare. But many people do not know that Medicare is mandatory once you're retired. The only exception is people who are part of an employer plan that covers 20 or more employees.   This does not include retiree plans.

Medicare Part A (hospital insurance) is free for the vast majority of people. Anyone who paid into the Social Security system for 10 years or is a dependent of someone who did is covered.   Although Social Security law does not require participants to accept Medicare and Medicare law does not require participants to accept Social Security, any senior who withdraws from Medicare also loses their Social Security benefits. This is the result of the Clinton administration tying the two programs together in 1993. Just this past February, an appeals court ruled that seniors can't reject Medicare and receive Social Security in a case that originated a few years ago. Click here to read more about this case.

Medicare is the primary payer for all patients over 65. Every claim for a patient over 65 is submitted to Medicare and only after Medicare pays its share is the claim submitted to private insurance. Private insurance will not pay unless Medicare pays their share.   As mentioned above, the only exception is group plans with 20 or more employees. Private insurance that doesn't pay second to Medicare is either too expensive or unavailable.

Sign up on time to avoid late enrollment penalties.

I cannot express how important it is to not miss your initial enrollment period for Medicare which begins 3 months before your 65th birthday and ends 3 months after.  For those already receiving Social Security benefits at age 65, enrollment is automatic for both Parts A & B (medical insurance).  For those not receiving Social Security, failure to enroll on time will result in costly penalties that last the rest of your life!  You will have to pay a 10% penalty for each 12 month period that you could have had Part B but didn't enroll. There is also a late penalty for failure to enroll in Part D (prescription drugs) on time unless you are covered by other creditable coverage. There is a justified reason for these hefty penalties. In the world of insurance, you absolutely cannot let people go without insurance and sign up only when they become ill. That defeats the purpose of insurance which by definition is managing uncertain risks, not known issues.

Since you must pay a monthly premium for Part B, you are given the option to opt out. Although Part B is not mandatory, it is extremely expensive and very difficult to obtain a private plan beyond age 65. I think it's safe to say that it never makes sense to seek private insurance instead of Medicare under our current healthcare system. Now you do need to obtain supplemental coverage on top of Medicare, but not in lieu of it. This leads me to the next fact.

Medicare doesn't cover everything.

An alarming 62% of pre-Medicare boomers don't understand what benefits will be for doctor or hospital visits. Unfortunately, many people who had comprehensive coverage will be surprised to find out all the things that are not covered such as dental, vision, hearing aids, alternative medicine (chiropractic, acupuncture, etc.), and any amounts over Medicare-approved coverage. 77% of Medicare recipients have some form of supplemental insurance because Medicare Part B simply leaves too many gaps. You have 2 options when it comes to supplementing Medicare: Medicare Advantage (also known as Part C) or MediGap policies. Both of these help cover costs not paid by Parts A & B including deductibles, co-payments and coinsurance.

Medicare Advantage plans are HMO or PPO plans offered by private companies and approved by Medicare. These plans combine Parts A & B and most likely Part D as well. On top of this, extra coverage such as vision, hearing, and dental are commonly added. You usually pay an extra premium on top of the Part B premium and these plans vary in cost and coverage by area.

Another option is purchasing a MediGap policy which is private insurance designed to supplement original Medicare (Parts A & B). MediGap policies are standardized and you have 10 levels of coverage to choose from. You'll also need to enroll in Part D separately. These plans also vary by area.

A lot of thought must go into choosing your supplemental coverage since there is a wide range of options that must be sifted through to find the plan that best meets your needs.

Your out-of-pocket health care costs in retirement will most likely be higher than you expect.

In the average Medicare household, 14.9% of gross spending goes towards health care. Recent studies show that most Medicare beneficiaries are actively pursuing ways to cut costs. For example, 69% have switched to generic drugs.

While 58% of pre-Medicare boomers know that you have to pay a premium, it is quite scary that 13% think Medicare is completely free. Those who think it's free are in for a rude awakening. When Medicare was created in 1965, the Part B premium was a mere $3/month. Now the premium is $99/month (for those not subject to an income-based surcharge), down from $116 last year due to the Affordable Care Act. You can be sure that these premiums will continue to rise without drastic reform.

It is also important to point out that Medicare premiums are means tested. Individuals with income over $85,000 and couples with income over $170,000 pay more. At the max tier (joint MAGI over $214,000), you pay $220/month more for Part B and $66/month more for Part D. But even at this level, Medicare is still cheaper than seeking a private insurer which would charge $1,500-$2,000/month per couple.

Medicare does not cover long term care.

57% of pre-Medicare boomers don't know if long term care at home or in a facility is covered and almost 30% think it is. Medicare exists to help keep seniors well and to nurse them back to health if they get sick. However, it was never meant to provide long term nursing home care for a patient who will never recover. While Medicare Part A will cover a brief stay in a skilled nursing facility if certain criteria are met, it will not pay for long term custodial care which is care that helps you with activities of daily living.

I won't spend a large amount of time on this subject because I wrote a memo on long term care just last year. If you missed out on that one or if you'd like to refresh your memory, you can read it here.

I hope this article has helped shed some light on Medicare and its benefits and shortcomings. It is so important to remain informed about this program since it will greatly impact your quality of life in retirement.