What are My Medicare Cost Sharing Obligations when I Retire?
Although you or your spouse paid into Medicare through payroll taxes during the years that you worked, it’s not a zero-cost system when you turn 65 years old. Many people who retire and get their Medicare benefits for the first time are caught off guard by the out-of-pocket costs with Medicare. In this MedicareWire article, we’ll walk you through your costs so you can plan ahead for your retirement years.
What is Medicare Cost Sharing?
Medicare is a health insurance program with several options. Traditional Medicare, known as Part A and Part B, offers basic coverage for major medical costs. Part C and D are private health plan options.
Medicare beneficiaries share costs with the federal government and health plans for their healthcare coverage. Here’s a quick look at the shared costs baked into each part:
- Medicare Part A (hospital coverage): The government pays 80%, and the beneficiary pays 20% co-insurance plus deductibles.
- Medicare Part B (medical coverage): The government pays 80% and the beneficiary pays 20% co-insurance, plus deductibles, plus premiums.
- Medicare Part C (private health plan): The government pays a flat rate to health plans and the beneficiary pays co-pays, co-insurance, and a monthly premium.
- Medicare Part D (prescription drug plan): The beneficiary pays a monthly premium and an annual deductible, then shares costs with the drug plan until the catastrophic spending level is reached, then the government pays most of the costs.
Medicare Savings Programs
For economically disadvantaged beneficiaries there are several government programs available that can assist with the shared costs in Medicare. Each of the Medicare Savings Programs is delivered through the Medicaid system in conjunction with the states. Specifically, if you qualify you can get assistance from your state paying your monthly Medicare premiums.
Medicare Savings Programs may also cover Medicare Part A and Medicare Part B deductibles, coinsurance, and copayments if you meet certain conditions. It all depends on your personal situation. Here’s a quick look at the four programs:
- Qualified Medicare Beneficiaries Program (QMB): The government pays the economically disadvantaged beneficiary’s Part B premiums and deductibles.
- Specified Low-Income Medicare Beneficiaries (SLMB): The government pays the Part B Medicare premium for qualified beneficiaries.
- Qualifying Individuals Program (QI): The government pays the Part B Medicare premium for qualified beneficiaries.
- Qualified Disabled and Working Individuals (QDWI): The government helps pay the Part A premium. This program is specifically for disabled persons. Qualification criteria may include age, income, employer health insurance, and state medical assistance.
If you want to know how to qualify for QMB, SLMB, or QI assistance, answer these three questions:
- Do you have, or are you eligible for, Medicare Part A?
- Is your income at, or below, the annual federal poverty income limits?
- Do you have limited resources?
If you answered ‘yes’ to all three questions, call your local Medicaid office to get more information. It’s important to call if you think you might qualify because the benefits are not automatic. Even if your income or assets are slightly more than the stated amounts you should call. The federal income and resource limits change from year to year. Check here for current information.
Your Cost-Sharing Depends on Your Personal Situation
Medicare is a cafeteria type system, not one size fits all. The “Parts” you choose, your income, and where you live all factor into the final equation. Where you live is a factor because private health plans are regional, which affects costs.
Medicare Part A Cost Sharing
Medicare Hospital Insurance (Part A) covers your hospital care when you are an inpatient. It’s free for anyone who has paid Social Security and Medicare payroll taxes for 10 years (40 quarters of work) and for the spouse of a person who has paid the taxes. Free is a bit of a misnomer. There are no additional costs because you already paid for the benefit through payroll taxes.
If you, or your spouse if you didn’t work, have 30-39 quarters of Medicare-covered employment, you’ll be required to pay a monthly premium that includes some cost-sharing with the government. For those people who are not eligible for Part A and have fewer than 30 quarters worked, you’ll pay the full Medicare Part A premium. You can find the Part A premium rates here (they change annually).
There are various co-payments and deductibles that go along with Part A coverage. Each inpatient benefit period (60 days) comes with a deductible ($1,408 in 2020). After the 60th day, there’s a daily co-payment ($352 in 2020 for days 61-90). With a co-payment in excess of $350 per day, these costs add up very fast. You can learn more about hospital costs here.
After a hospital stay of three days or more, some patients may be transferred to a skilled nursing facility for rehabilitation. The first 20 days are free. For days 21-100, the co-payment is $170.50 per day (2020 rates). You can find current rates here.
Medicare Part B Cost Sharing
Medicare Medical Insurance (Part B) covers your doctor bills, including lab tests, screenings, imaging, etc. There’s a monthly premium of $144.60 per month (2020 rate) for the majority of the 61 million beneficiaries. However, individuals with income up to $85,000 per year, and married couples with incomes up to $170,000 pay more.
You also have an annual deductible and co-payments to pay when you use services. The annual deductible is $198 (2020 rate). After your deductible is met, you typically pay 20% of the Medicare-approved amount for most doctor services, therapy, and durable medical equipment. This includes doctor services while you’re an inpatient.
Medicare Part C (Advantage Plan) Cost Sharing
Once you see the cost-sharing that’s baked into traditional Medicare, it’s easy to see why most Americans get additional insurance. One of the popular options is Medicare Advantage.
Medicare Advantage plans are private health plans, similar to Obamacare and the healthcare offered through your employer. Common options include HMO, PPO, and Medical Savings Account plans, however, all plan options are regional (by county).
The “advantage” of these plans is that the government allows them to offer additional benefits that are not part of Medicare Part A and Part B. The most common additional benefit is prescription drug coverage.
Unlike Medicare Part A and Part B, cost-sharing is not standardized. With most Medicare Advantage plans you pay a monthly premium (Medicare Part B plus any additional premium charged by the plan), co-pays or co-insurance when you use services, and an annual deductible if the plan includes prescription coverage. While this seems simple enough, beware that all plans charge different co-payments and coinsurance for different services. Also, the rates are normally higher if you don’t use in-network providers.
You can compare Medicare Advantage plans on this page.
Medicare Part D (Prescription Drug Plan) Cost Sharing
When Medicare was first enacted in 1965, prescription drug costs were quite modest, so coverage wasn’t an issue. By the 1990s drug prices skyrocketed. Part D of Medicare was added in 2003 to address this problem.
Medicare Part D cost-sharing is the most difficult part of Medicare for most people to get a handle on. The reason for this has to do with the four phases of coverage:
- Initial Deductible: In this phase, you pay 100% of all costs until spending reaches the annual standard deductible set by your plan.
- Initial Coverage Limit (ICL): In this phase, you and your plan share costs until spending reached the annual ICL, which adjusts each year.
- Coverage Gap (Donut Hole): In this phase, you pay 25% of the retail costs of all generic and brand name medications.
- Catastrophic Coverage: In this phase, you pay up to $3.60 for all generic/preferred multi-source medications and up to $8.95 for all others.
What makes Part D difficult to understand is the difference between what you pay and how the Centers for Medicare and Medicaid Services (CMS) does its accounting on drug spending. Across all phases, CMS looks at the total retail costs of drugs to determine which phase of your Part D plan you are in.
You can shop Medicare Part D plans and compare them here.
Medicare Supplement Plans for Traditional Medicare Gap Coverage
No discussion on Medicare cost-sharing would be complete without talking about Medicare Supplement insurance (Medigap). These insurance products have been around since the inception of Medicare itself, and many retirees consider them the best option available to cover the co-payment and coinsurance portion of Medicare.
Medigap plans a super simple to understand once you know that:
- A Medigap plan will only cover Medicare-approved costs (no extras, like prescriptions, dental, or vision); and
- Medigap plans are standardized (there are 10 lettered plans).
With Medicare supplement insurance, you choose the level of coverage you need, and the plan pays its share. The big difference (financial) between Medigap coverage and a Medicare Advantage plan is predictable costs. With Medigap you pay for your coverage monthly, weather you use healthcare services or not. With Medicare Advantage, you pay smaller monthly premiums, but you have unpredictable co-pays and coinsurance bills when you use health services.
Compare Medicare supplement plans with this tool.
Shared Costs Worth a Second Look
Above, we walked through all of the costs baked into the Medicare system and how the costs are covered by each Part. However, what we haven’t yet covered are the various “gotchas” that can harm you financially if you’re not careful.
One of the most frequent complaints voiced by beneficiaries is, “I thought my Medicare Advantage plan was going to save me money.” The reality is that for some people Advantage plans do save money and for others, they don’t. It all depends on your personal situation. That may seem like a wishy-washy statement, but it’s a fact.
Before making Medicare enrollment choices you must seriously consider both your personal and financial health situation. Traditional Medicare covers 80 percent of your major medical costs. For many people, paying 20 percent of occasional doctor visits isn’t a big deal. But, what if you have one or more chronic conditions that require regular doctor visits? And, what about the $1,408 Part A deductible if you have a stay in the hospital for a few days?
You might look at these costs and think that a zero-dollar premium or low-cost Medicare Advantage plan is a great way to avoid hefty healthcare bills. This is where “It all depends on your personal situation” comes into play. For example, if you qualify for one of the Medicare Savings Programs, and you’re receiving assistance to cover the monthly premiums and deductibles, these expenses won’t hit your budget. If you don’t receive assistance these costs will impact your monthly budget.
People often make the mistake of looking at up-front costs rather than total costs or maximum potential costs. This is where seriously considering your personal health comes in. If you’re a healthy person, lead a healthy lifestyle, and don’t have a family history of serious illnesses, choosing Medicare Advantage can be a cost-saving option. For people in this situation, who rarely see their doctor for anything other than their annual checkup, Medicare Advantage offers many cost-saving benefits.
For people entering Medicare with one or more chronic health conditions, or a family history of serious illness, Medicare Advantage may have unexpected costs consequences. Although Medicare Advantage plans are required to offer all of the same basic benefits as traditional Medicare, they don’t have to cover those benefits in exactly the same way. Sure, when you see your doctor your copays will probably be less, but did you know you may end up paying multiple copays to see a specialist? You’ll pay once to see your primary care doctor for the referral and again to see the specialist.
Also, don’t forget to look at hospital costs. In traditional Medicare, you pay a $1,408 deductible (2020 amount) per benefit period and $0 coinsurance for the first 60 days. However, Medicare Advantage plans charge a daily copay, which typically runs $275 to $300 per day for the first five days. These costs might seem similar, but in traditional Medicare, if you are readmitted within 30 days (for the same or a related issue), you are covered under the original benefit period. The same is not true with all Medicare Advantage plans, meaning you could get hit with more co-payments.
For the reasons just outlined, and many more, it’s important to consider all potential costs. When you do, it’s easier to evaluate and choose the best coverage based on the risk/reward, and not simply the monthly premium.
There are a lot of moving parts with Medicare, and they all have shared costs. It pays to understand and plan for these costs before you retire. The decisions you make when enrolling in Medicare for the first time can have a lasting impact on your costs for the rest of your life. Choose wisely.
David Bynon is a recognized Medicare expert. His books on Medicare are available on Amazon.com.