Understanding the Financial Basics of Healthcare in Retirement
Before you can effectively manage costs, you need to understand the landscape. For most Americans over 65, this starts with Medicare. But Medicare isn’t a single, all-inclusive plan; it’s a system with several parts, each with its own rules and costs. Let’s break them down.
The Four Parts of Medicare
Think of Medicare as a puzzle with four main pieces. You can choose different ways to put them together.
Part A (Hospital Insurance): This is the part of Original Medicare that helps cover inpatient care in a hospital, skilled nursing facility care (following a hospital stay), hospice care, and home health care. For most people, Part A is premium-free because they or their spouse paid Medicare taxes for at least 10 years while working. However, it’s not completely free; you will still face a deductible for each hospital stay and coinsurance for extended stays.
Part B (Medical Insurance): This is the other half of Original Medicare. It helps cover medically necessary services from doctors and other healthcare providers, outpatient care, preventive services, ambulance services, and durable medical equipment. Part B requires a monthly premium, which is deducted from your Social Security benefits for most people. There is also an annual deductible. After you meet your deductible, you typically pay 20% of the Medicare-approved amount for most services. This 20% is known as coinsurance and has no annual limit.
Part D (Prescription Drug Coverage): Original Medicare (Parts A and B) does not cover most prescription drugs. Part D adds this crucial coverage. These plans are offered by private insurance companies approved by Medicare. You choose a specific Part D plan and pay a separate monthly premium for it.
Part C (Medicare Advantage): These are all-in-one plans offered by private companies that bundle Parts A, B, and usually D into a single plan. They are an alternative to having Original Medicare. Medicare Advantage plans often have different cost structures, like lower premiums but require you to use a specific network of doctors and hospitals (like an HMO or PPO). Many also include extra benefits not covered by Original Medicare, such as routine dental, vision, and hearing care.
Covering the Gaps: Medigap and Out-of-Pocket Costs
The 20% coinsurance on Part B can be financially devastating if you face a serious health issue, as there is no cap on your annual spending. This is where Medicare Supplement Insurance, also known as Medigap, comes in.
A Medigap policy is something you buy from a private company to help pay for some of the remaining costs that Original Medicare doesn’t cover, like your deductibles, coinsurance, and copayments. It only works with Original Medicare; you cannot have a Medigap plan and a Medicare Advantage plan at the same time.
Here’s a simple numerical example to clarify out-of-pocket costs with Original Medicare:
Imagine the Part B deductible is $240 for the year. You are responsible for paying this first. After you’ve paid $240 in medical bills, Medicare Part B begins to pay 80% of covered services. If you have a doctor’s bill for $500, you would pay a 20% coinsurance, which is $100. A Medigap plan could be purchased to cover that $100 for you, in exchange for a monthly premium.
For official information on Social Security and Medicare, visit SSA.gov and Medicare.gov. Federal tax information is at the IRS.
