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Think Medicare will Cover All Your Health Care Expenses in Retirement? Think Again

Insights & Ideas Team •  September 29, 2015 | Enjoying Retirement

It’s an assumption many pre-retirees make: that Medicare will pay for all of their health costs in retirement. Turns out, the reality is much different.

While Medicare pays for a wide range of preventive and medically necessary services, the Employee Benefit Research Institute (EBRI) reported that Medicare pays only about 60 percent of health care costs in retirement1. Another study, this one from the Mount Sinai School of Medicine (2012), found that as many as a quarter of Medicare recipients spend more than the total value of their assets on out-of-pocket health care expenses, such as copayments, coinsurance and costs that aren’t covered by Medicare, during the last five years of their lives.

With health care costs expected to outpace inflation for the foreseeable future, according to a September 2014 report from the Centers for Medicare & Medicaid Services, out-of-pocket medical expenses are likely to consume a larger portion of your retirement budget over time. Here’s what you can do to plan ahead.

1. Understand Medicare basics. Medicare has four parts—A, B, C and D. One way to cut through the alphabet soup of confusion is to recognize that you essentially have two paths for receiving coverage. The first path is to choose Original Medicare (or “Traditional Medicare,” as occasionally referred to on the website), which includes Part A to help cover inpatient hospital stays, hospice, etc., and Part B to help cover certain doctor visits and outpatient services. Because Original Medicare does not provide prescription drug coverage, retirees often purchase Medicare Part D. Some also buy a Medicare supplemental plan (Medigap) to fill in some of the coverage gaps in Medicare Parts A and B, such as copayments and deductibles.

The second path is to select a Medicare Advantage plan (Part C), which is offered by private insurers that contract with Medicare to provide all of your Part A and Part B benefits. Some Medicare Advantage plans offer prescription drug as well as coverage for other expenses not covered through Medicare Parts A and B, such as vision and dental coverage. Medicare Advantage plans differ greatly when it comes to  out-of-pocket costs and the rules on how to obtain different services.

Keep in mind, Original Medical and Medicare Advantage plans also differ in other important ways, which is why it’s crucial to understand the pros and cons of each option.

2. Get a handle on health care expenses in retirement. Failing to plan for health care expenses can derail even the strongest of retirement income plans. That’s why it’s crucial to consider health care expenses as you set your budget for retirement. While health care costs are unpredictable and vary by individual circumstances, the following provides a place to start.

Based on data from, Northwestern Mutual estimated annual out-of-pocket health care expenses for retirees, including premiums, deductibles and copays. According to the calculations, which exclude long-term care costs, retirees on Medicare who turned 65 in 2014 can expect to pay the following each year during retirement:

  • $3,000 to $5,000 per year if they are in very good to excellent health
  • $5,000 to $7,000 per year if they are in fair to good health
  • $7,000 to $10,000 per year if they are in poor health

Keep in mind that these numbers are averages; retirees with a chronic or long-term illness could end up paying a lot more out of pocket for the care they need. Also, premiums for Medicare vary based on income, so your out-of-pocket expenses may be higher depending on your financial situation in retirement.

3. Weigh your options. Getting the right Medicare plan for your specific needs requires you to make several important decisions. While every retiree’s needs are different, there are a few key factors to consider when weighing your options.

  • Open Network or HMO? In general, many physicians and hospitals will accept Original Medicare and Medigap policies, giving you flexibility to see the doctor you want. With a Medicare Advantage plan (Part C), you may be required to select your doctor from a particular network of physicians. For some retirees, this can mean having to switch to a new physician or using one that you’re less comfortable seeing.
  • What about your prescription drug needs? Because Medicare Part D prescription drug coverage is provided by private insurers, the level of coverage varies from plan to plan. The same is true if you have a Medicare Advantage plan. Because each Medicare drug plan has its own list of covered drugs and other variables, it’s important to carefully compare your prescription drug needs against your different plan options.
  • How do you feel about deductibles and copays? The total cost of premiums, copayments and deductibles under a Medicare Advantage plan is often lower than the total costs for coinsurance, copayments and deductibles in Original Medicare. Each Medicare Advantage plan charges different premiums and has different costs for services, so understanding the plan is essential before you join.
  • What’s your budget? Because Medicare premiums vary based on your location and the type and level of coverage you select, it makes sense to shop around and compare not only price but also the services you’ll be getting for the price you pay.

Understanding the basics of Medicare is essential to getting the right coverage for your needs, not just today but throughout retirement. To help you better navigate your Medicare choices, Northwestern Mutual published Medicare Simplified, a guide to help consumers understand the various parts of Medicare and to provide information as you compare the options available under Medicare. You can download a copy to learn more about your Medicare options.

EBRI, Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News pg 1, 2012

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