For most Americans, retirement means changing health coverage from an employer’s plan to Medicare. However, this transition is typically not automatic or inexpensive. Medicare has four parts, with each bringing its own set of expenses and enrollment timetables. Here’s how to minimize the cost of each part and avoid late enrollment penalties. You may also want to work with a financial advisor to help you figure out what your retirement costs will be and to create a plan for your income during your golden years.
What is Medicare?
Medicare is a health insurance program the United States federal government sponsors primarily for seniors. It also covers specific younger individuals with disabilities, end-stage renal disease (ESRD) or amyotrophic lateral sclerosis (ALS). Payroll taxes and monthly premiums from enrollees fund the program.
Medicare consists of several parts, each covering different aspects of healthcare:
- Medicare Part A (Hospital Insurance): This part covers inpatient hospital stays, skilled nursing facility care, hospice care and some home healthcare services.
- Medicare Part B (Medical Insurance): Part B covers outpatient medical services, including doctor’s visits, preventive care, medical supplies and specific diagnostic tests. It requires a monthly premium from beneficiaries.
- Medicare Part C (Medicare Advantage): Private insurance companies approved by Medicare offer plans combining Parts A and B. In addition, they often include additional benefits such as prescription drug coverage (Part D), dental care or vision care. Beneficiaries who choose Part C must still pay their Part B premium and any additional premium required by the plan.
- Medicare Part D (Prescription Drug Coverage): This part provides prescription drug coverage through private insurance companies. Part D plans help reduce the cost of prescription medications for Medicare beneficiaries.
Remember, although Medicare provides substantial coverage, it does not cover all healthcare expenses. There may still be out-of-pocket costs, such as deductibles, copayments and coinsurance. As a result, some individuals supplement their Medicare coverage with private Medigap policies to help cover these additional expenses.
Medicare Cost Terms
Here’s an explanation of the terms every Medicare enrollee should know:
- Coinsurance: Coinsurance is the percentage of the cost of a covered healthcare service you are responsible for paying. For example, if Medicare covers 90% of a particular service, the remaining 10% would be your coinsurance. You would need to pay this amount out of pocket. So, if a medical procedure costs $100, you would pay $10 and Medicare would cover the rest.
- Copayment: A copayment (or copay) is a fixed amount you pay for a covered healthcare service at the time of receiving the service. They often apply to doctor visits, prescription medications or other medical services. For instance, you might have a copayment of $20 for a doctor’s office visit or $10 for a prescription.
- Deductible: A deductible is the amount you must pay out of pocket for healthcare services before Medicare begins to cover its share. Once you reach the deductible amount, Medicare will typically start paying its portion of the covered services. Deductibles are usually associated with Medicare Part A and Part B. For example, if you have a Part B deductible of $200, you must pay that amount before Medicare starts covering its percentage.
- Premium: A premium is the amount you pay regularly (such as every month, quarter or year) to maintain your Medicare coverage. It is typically a fixed fee you owe regardless of whether you use any healthcare services or not. For instance, Medicare Part B has a monthly premium that beneficiaries must pay to maintain coverage.
How Much Does Medicare Cost?
Each part of Medicare has different costs. Here’s a breakdown of how much Medicare costs in 2023:
Medicare Part A
Those who paid Medicare taxes while working don’t owe a premium for Part A. However, if you haven’t paid sufficient taxes, the government can charge a $506 monthly premium. In addition, you’ll receive a financial penalty if you don’t enroll in Medicare once you’re eligible, further increasing costs.
Aside from premiums, Part A comes with costs for specific forms of care. First, hospital stays incur the following expenses:
- $1,600 annual deductible
- $0 coinsurance for hospital stays for the first 60 days of the year
- $400 coinsurance per day for hospital stays during days 61 through 90
- $800 coinsurance per day after day 90 of the year. You are allowed a total of 60 of these “lifetime reserve days” throughout your life.
Next, Medicare has the following cost schedule for skilled nursing facilities for 2023:
- $0 for the first 20 days of the year
- $200 per day for the 21st through the 100th day
- 100% of the costs for each day onward
Medicare Part B
Your income determines Medicare Part B payments, with $164.90 being the most common premium in 2023. The government uses your modified adjusted gross income (MAGI) from your tax return from two years ago to set your premium amount. However, if you are a new enrollee in Medicare Part B this year, you’ll pay $164.90 instead of the government using your MAGI.
On the other hand, if you’ve had Medicare Part B for a few years, the government will start using your MAGI to determine your premium. Here are the income thresholds for each premium payment:
Modified adjusted gross income for 2023
|Filed single||Filed jointly||File married & separate||2023 Premium payment|
|$97,000 or less||$194,000 or less||$97,000 or less||$164.90|
|Between $97,001 and $123,000||Between $194,001 and $246,000||N/A||$230.80|
|Between $123,001 and $153,000||Between $246,001 and $306,000||N/A||$329.70|
|Between $153,001 and $183,000||Between $306,001 and $366,000||N/A||$428.60|
|Between $183,001 and $499,999||Between $366,001 and $749,999||Between $97,001 and $402,999||$527.50|
|$500,000 and up||$750,000 and up||$403,000 and up||$560.50|
In addition, Part B has a $226 annual deductible for 2023. Upon meeting the deductible, you’ll have a 20% copay for most hospital services, durable medical equipment (DME) and outpatient therapy. Likewise, mental health visits with a physician have a 20% copay.
Medicare Part C (Medicare Advantage)
The federal government does not provide Medicare Part C. Instead, it hires private insurance companies to administer this coverage, combining Part A, Part B and enhanced benefits. Because these plans are private, their costs vary. That said, Medicare Advantage plans often have $0 premiums.
Medicare Part D
Similarly, Medicare Part D is privately provided. As a result, it’s best to shop around for the best price and purchase coverage according to your prescription drug needs. Remember, the 2023 Part D national base premium is $32.74, giving a ballpark figure for enrollees. In addition, this chart gives an estimate of your monthly Part D costs based on income:
Modified adjusted gross income for 2023
|Filed single||Filed jointly||File married & separate||2023 Premium payment|
|$97,000 or less||$194,000 or less||$97,000 or less||Your plan premium|
|Between $97,001 and $123,000||Between $194,001 and $246,000||N/A||$12.20 + your plan premium|
|Between $123,001 and $153,000||Between $246,001 and $306,000||N/A||$31.50 + your plan premium|
|Between $153,001 and $183,000||Between $306,001 and $366,000||N/A||$50.70 + your plan premium|
|Between $183,001 and $499,999||Between $366,001 and $749,999||Between $97,001 and $402,999||$70.00 + your plan premium|
|$500,000 and up||$750,000 and up||$403,000 and up||$76.40 + your plan premium|
How to Reduce Your Medicare Premiums
Although Medicare costs will play some part in your retirement budget, you can implement these strategies to minimize them:
Sign Up When You First Become Eligible
When you first become eligible for Medicare, it’s crucial to enroll promptly. Signing up during your Initial Enrollment Period (IEP) helps you avoid late enrollment penalties. This tip applies to Parts A, B and D. Specifically, with Part A, you’ll pay 10% of the premiums for twice the years you didn’t enroll when you could have. For instance, say your premium would have been $165, but you didn’t sign up for two years. In this case, you’ll pay an additional $16.50 for your monthly premium for four years after enrolling.
Next, For Part B, you’ll pay 10% more for your monthly premium for each year not enrolled, permanently increasing your Medicare costs. Lastly, for Part D, you’ll pay an extra 1% for each month you don’t enter a Medicare drug plan when you first get Medicare or go 63 days without creditable drug coverage.
If you have creditable health insurance coverage from another source, such as an employer, you can delay enrolling in Medicare Parts B and D without facing penalties. Creditable coverage refers to insurance providing coverage of similar or better quality than Medicare’s. Failing to obtain creditable health insurance coverage means enrolling in Medicare or facing a penalty.
Know the Different Enrollment Periods
Understanding the various enrollment periods can help you make informed decisions and potentially reduce premiums. These include the Initial Enrollment Period, General Enrollment Period, Special Enrollment Period and Medicare Advantage Open Enrollment Period. Each period has specific eligibility criteria and timelines. By enrolling during the appropriate period, you can avoid penalties and potential gaps in coverage.
Watch Your Retirement Distributions
The government bases the Parts B and D premiums on your income. For example, if lowering your monthly distributions by a few dollars puts your annual income under $97,000, you’ll save about $790 in premiums for Part B.
Use a Tax-Free Account
Tax-advantaged accounts can help save money on healthcare expenses. First, contributing to a Roth IRA while working creates tax-free income during retirement. So, your Roth distributions won’t count toward MAGI. Second, a health savings account (HSA) allows tax-free contributions and distributions. As a result, the bill lowers your taxes while you work and creates a fund to defray medical costs in retirement.
Medicare costs change every year. However, the government uses your income to determine your premiums for Parts B and D. You can minimize premiums by enrolling on time and understanding how your income relates to the premium thresholds. In addition, you’ll pay deductibles, copays and coinsurance according to government-set prices. Therefore, it’s vital to save for retirement with tax-advantaged accounts and understand when to enroll in each part of the program.
Next Steps for Assessing Medicare Costs
- Experts predict healthcare costs in retirement of $295,000 to $315,000 for a new retiree. Footing this bill entails having a detailed savings plan during your career. Fortunately, a financial advisor can help you build a financial plan for these and other retirement expenses. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Enrolling in Medicare promptly is essential for reducing costs and obtaining the health coverage you need in retirement. However, you might get automatically enrolled in specific situations.
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