Make Sure You Can Afford Medicare
by Ellen Hoffman
With health-care costs skyrocketing and retiree health insurance disappearing, the best coverage that most aging retirees can hope for, once they turn 65, is Medicare. If you haven't focused on this issue lately, it's time to make sure that the still-rising costs are included in your financial plan for retirement.
Admittedly, any projection you make is, at best, a good guess. The Medicare program of today, with a new drug plan and means-tested premiums for outpatient coverage, is not the same as it was a few years ago, and Congress can change the law just about any time it wants.
Also, the money that is going into the program is not keeping up with the outflow. In their 2007 annual report, Medicare trustees projected that assets in the hospital fund will fall below expenditures in 2013, and six years later, revenue from taxes will pay only 79% of those costs. Despite several years of similar warnings, Congress and the executive branch have yet to enact a plan to address the coming shortfall.
REAL-LIFE ESTIMATES
To estimate your future Medicare costs, you should understand the various parts of Medicare--Part A, Part B, Part D, and Medigap or supplemental insurance--and how they are funded. The most basic resource on how Medicare works is Medicare and You.
But to get an idea of how payments could add up in real life, I did some trial runs on a straightforward, hypothetical example: John and Jenny Jones, each 65, are married. Both will be going on Medicare this year. I gave them a home in downtown Chicago and a retirement income of $100,000 per year. (The following example assumes that they are on "traditional" Medicare, choosing their own individual providers, not on "Medicare Advantage," the alternative used by about 20% of beneficiaries, which is based on using HMOs and other group plans.)
Part A pays the bills when you're hospitalized. If you or your spouse paid into Medicare while working, you will have no out-of-pocket expenses. John and Jenny both retired from successful careers, so they don't have to pay for Part A now. (People who were outside the system, however, must pay $410 a month or $4,920 for the year in 2007, for coverage. If you have worked and paid federal taxes, you have already paid into the system.)
DRUGS BY THE ZIP CODE
When you receive outpatient medical services, Medicare Part B kicks in. This covers such things as visits to the doctor, lab tests, mammograms, prostate screening, and emergency room services. In 2007, for the first time, the amount of the Part B premium you have to pay depends on your income. The Joneses are a married couple with joint income under $160,000, so they'll pay the lowest rate--they will each pay $93.50 per month, adding up to $2,244 for the two of them for the year. (The new sliding scale tops out at monthly premiums of $161.40 for an individual with more than $200,000 in annual income, or a couple with a combined income above $400,000.)
The third Medicare component is the new Part D prescription program. The coverage available to you depends on where you live. According to the search tool on the Medicare Web site, the Joneses can choose from more than 50 different drug plans offered in their Zip Code. Their first decision is whether to opt for a plan to help them pay the costs of the "coverage gap." The "gap" refers to the time in a calendar year when you've spent $2,400 on prescription drugs and now must pay all of your drug costs out of pocket until you hit an out-of-pocket limit of $3,051.25 just for prescriptions.
PLUGGING THE GAPS
Let's say the Joneses choose a Part D policy that will cover their expenses while in the "gap." The least expensive such policy is $39.90 each per month. For both of them, this comes to $957.60 in 2007. (A rock-bottom Part D policy in their area, without coverage for the gap, would run around $17 each per month.)
Now we come to the most expensive part: Medigap or supplemental insurance. The purpose of this insurance is to plug the other Medicare coverage gaps, such as the $992 deductible for a hospital stay, and co-payments of 20% for Part B services.
Medigap insurance plans are labeled "A" to "L," and the specifics of each version are prescribed by the federal government. Many insurers sell the policies, and the cost will differ depending on where you live and what policy you buy. According to Medicare's estimates, the range of costs for the Joneses' Medigap options is $4,350 to $4,800. Let's say they choose one that runs $4,600 for each--$9,200 a year for both.
Now it's time to add up the bill: Zero for Part A, $2,244 for Part B, $957.60 for Part D and $9,200 for a Medigap policy, for a total of $12,401.60--about 12% of John and Jenny's income.
THE ALTERNATIVE? NO ALTERNATIVE
This example offers only a snapshot of a middle-of-the road approach to one couple's Medicare coverage choices. But there are several factors that could make your own Medicare costs even higher: Premiums and co-payments go up every year even if the benefits stay the same; if you develop a serious medical problem you could owe a lot of co-payments for hospitalization, skilled nursing care, and prescription drugs; and when the government does make fixes to Medicare's financing, they are likely to include raising more money from beneficiaries as well as younger taxpayers.
If you think this sounds discouraging, then contemplate the alternative: Tricia Neuman, vice-president for the Kaiser Family Foundation, a nonprofit that focuses on health-care policy, says there isn't one. It's very difficult for people of Medicare age to find individual insurance, and if they do, she says, chances are it will exclude the very medical problems they need covered.
So if your financial plan for retirement doesn't include a generous medical-care budget, now--not a few months before you retire--is the time to come up with a plan that will enable you to pay the bills that start to arrive when you turn 65.
In addition to writing Your Retirement for BusinessWeek.com, Hoffman is the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam. You can contact her through her Web site, www.retirementcatchup.com.