Thursday, January 23, 2014

Cost of Health Care-Medicare

Retirement planning involves covering estimated expenses in retirement from known resources. Those resources may include pensions, Social Security benefits, earnings from investments, part-time work, or any combination of the above. Estimating expenses in retirement can be a more “interesting” exercise. Many pre-retirees can make a reasonable estimate of basic living expenses (usually in today’s dollars which can be adjusted for inflation). One of the major variables, especially in the new era of Obama care, is the cost of health care over a retirement career.

Health care costs have risen over 400% since the early ‘80’s (Dept. of Labor Statistics, Consumer Price Index as of Nov, 2012). In addition, they represent one of the top three (number 2) household budget items (Infogroup/ORC , Princeton, NJ telephone survey in March of 2010). Most people assume costs will be covered by private insurance or Medicare. The private insurance situation is certainly “up in the air” given uncertainty surrounding the implementation of Obama care. But how about the health care costs associated with Medicare? According to a Fidelity Benefits Consulting estimate in 2013, the average out-of-pocket health care cost for a 65 year old couple is $220,000 (assumed no employer provided retiree health care coverage, traditional Medicare benefits, and life expectancies of 17 and 20 years respectively for husband and wife). Obviously, individual costs will vary depending your specific health level and age at retirement. To evaluate how much you need to plan on health care spending, let’s look at some of the Medicare options.

Medicare Options

Medicare has several options; these are as follows:
  • Part A- Hospital insurance
  • Part B- Medical insurance
  • Part D- Prescription drug coverage
  • Medigap- Medicare supplemental insurance
  • Part C- Medicare Advantage Plans
There are key dates associated with Medicare enrollment (generally reaching age 65)—you should contact the Social Security office to ensure compliance with those programs.

Medicare Costs

Now let’s examine some of the cost the retiree must pay under Medicare.

  1. Deductibles (paid by the retiree) for Part A (Hospital insurance)
    • Days 1-60---$1184
    • Days 61-90--$296 per day copay (29 x $296= $8584)
    • Days 91-150—“lifetime reserve days at $592 per day (59 x  $592 =$34,928)
    • Days 151+--All costs paid by retiree
  2. Costs (2013) for Medicare Part B—medical insurance
    • Monthly premium--$104.90 (increases as adjusted gross income increases
    • $147 deductible
    • 20% coinsurance paid by retiree on doctors’ services and outpatient care
  3. Prescription Drug Coverage-Medicare Part D
    • Benefits here are complicated depending on drugs (generic or branded) and the “donut” hole (i.e. that area in prescription cost in which the Medicare recipient pays the full cost of prescriptions). Suffice to say that the retiree can pay up $4,750 out of $6,735 in total drug cost.
Medigap Insurance

Supplemental Medicare insurance (Medigap) provides insurance coverage for some of the items Medicare does not cover. The basic items in this insurance are as follows:

  1. There are 10 standardized plans offering different levels of coverage.
  2. The premiums for the same coverage or plan vary with the state where the Medicare recipient resides and the insurance company providing coverage in that state.
  3. Recipients may see any doctor who accepts Medicare.
  4. There is no coverage for prescription drugs, dental, hearing, or vision costs.
Medicare Part C

Medicare Advantage plans include HMOs, PPOs, private fee-for- service plans, and Medicare specialty plans. They usually address Part A and Part B expenses and may cover prescription drugs. Expenses are less if one uses the “in-network” medical providers; however, one may choose “out-of-network” doctors (usually by paying an increased cost). Other services (dental, hearing, and vision) may also be covered.

Key Questions

As you choose your options under health care services, there are several questions you should consider.
  1. Do you have insurance coverage for dental, hearing, and vision (services not covered by Medicare)? If not, is that coverage important to you?
  2. Do you want to continue seeing your current health care providers?
  3. Have you considered the total out of pocket costs for prescription drugs—especially as you age.
  4. Do you want the ability to choose your own health care provider (particularly specialists) rather than be forced to choose from a pre-selected group of providers?
  5. Do you have protection in the case of catastrophic illness?
Total Cost
 
Total cost for insurance outlined above will obviously vary (state of coverage, income levels, and plans chosen). However, for a married couple age 65 years of age with combined annual income less than $170,000, annual costs would be $5000-$6000 per person. That is coverage for insurance only and does not include the out of pocket expenses that the couple would pay resulting from a hospital stay or prescription drugs required.
 
We, at Paragon Financial Advisors, will be glad to assist you in planning for retirement. We are fee only planners and do not sell any insurance products. Our goal is to help you make the best economic decisions for you. Implementation of those decisions is done through the appropriate professional of you choice. If you have unanswered questions or need additional guidance please call us. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.We offer financial planning and investment management services for clients.

 
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