What Pre-Retirees Need to Know About Medicare

Medicare plays a pivotal role in retirement planning. It’s a lifeline for over 67 million Americans, ensuring they remain happy and healthy for years to come. As healthcare costs continue to rise, having a solid understanding of Medicare is essential for financial security during retirement.

In this blog, we'll explore the basics of Medicare, the costs associated, and how it integrates into a broader retirement strategy. Let’s dive in!

Understanding Medicare Basics

Medicare is divided into four parts, each offering different types of coverage:

Part A covers inpatient hospital stays, skilled nursing facilities, hospice care, and home health services. Most people don’t pay a premium for Part A if they’ve worked and paid Medicare taxes for at least ten years (40 quarters).
Part B covers outpatient services, doctor visits, preventive care, x-rays, select prescription drugs, and medical equipment like prosthetic devices. Part B has a starting monthly premium of $174.70 and is indexed for taxable income; you’ll also pay deductibles and coinsurance.
Part C (Medicare Advantage) is an alternative to Original Medicare (Parts A and B) offered through private insurers. It often includes additional benefits like vision, dental, and prescription drug coverage.
Part D provides prescription drug coverage through private insurance companies approved by Medicare. Most people sign up for Part D when they first become eligible to enroll in Medical.

Before you can enroll in Medicare, there are specific enrollment periods to be aware of:

Initial Enrollment Period (IEP): This is the first time you can enroll in Medicare. It’s a seven-month window around your 65th birthday (3 months before, the month of and 3 months after your birth month).
General Enrollment Period (GEP): 3 months from January 1 to March 31 each year for those who missed their IEP.
Special Enrollment Periods (SEPs) are available for people with special circumstances, such as those who are still working and have employer health coverage.

Coverage and Costs Of Medicare

Each part of Medicare has its structure for premiums, deductibles, and coinsurance:

Part A is usually premium-free, but inpatient hospital stays and other services come with deductibles and coinsurance. However, in 2024, if you’ve worked for less than 30 quarters, the Part A premium is $505 per month.
Part B has a monthly premium that increases based on income, an annual deductible, and a 20% coinsurance rate after the deductible is met. It covers a wide variety of medical services, such as ambulances, preventative services, therapy, and mental health services.
Part C (Medicare Advantage) premiums vary depending on the plan and provider. It offers the same benefits as Original Medicare (Parts A and B) but with different rules, costs, and coverages. Most individuals get Part D as part of their Medicare Advantage benefits package.
Part D costs include monthly premiums, annual deductibles, and copayments or medication coinsurance.

Many retirees opt for Medigap or Medicare Advantage plans to help cover out-of-pocket costs that Medicare doesn’t, like deductibles, coinsurance, and copayments. Medigap policies (also called Medicare Supplement Insurance) help fill these gaps, while Medicare Advantage Plans often provide bundled coverage, including Part D.

Prescription Drug Coverage (Part D)

Prescription drug coverage is critical to Medicare, particularly for those with ongoing medication needs. Private insurers offer part D plans, each with a formulary—a list of which drugs are covered and which aren’t. These formularies are divided into five tiers, which determine the cost of the drugs, with tier 1 being the most cost-effective option.

There are two ways to receive Medicare Part D prescription drug coverage:

You add a Part D prescription drug plan to your existing Medicare coverage
You add Part D as a part of your Medicare Advantage (Part C) plan

Choosing the right Part D plan depends on the specific medications you take, their tier levels, and the plan’s cost-sharing structure. The Medicare Plan Finder tool can help compare available Part D plans based on your prescription needs.

2025 will bring some additional changes to Part D coverage (but don’t worry, they are positive updates).

In 2025, the “donut hole”—or coverage gap—will close, meaning that once members reach their deductible, they will have to pay no more than 25% of the cost for drugs covered by their plan until they reach an out-of-pocket drug cost of $2,000. If you reach the $2,000 maximum, you won’t be required to pay for covered Part D drugs for the rest of the year.

Medicare Advantage vs. Original Medicare

Medicare Advantage (Part C) plans provide an alternative to Original Medicare (Parts A and B), offering additional benefits such as vision, dental, and hearing coverage. However, these plans typically have network restrictions, requiring you to use healthcare providers within a specific network, similar to an HMO or PPO. So how do you decide? Let’s break down the pros and cons of Medicare Advantage and Original Medicare.

Medicare Advantage

Pros:

Additional benefits
Potentially lower out-of-pocket costs
Simplified coverage under one plan

Cons:

Limited provider networks and plans are limited to geographical areas
Potential for higher costs if you go outside the network
Prior authorization is often required

Original Medicare

Pros:

You can choose any primary care doctor who accepts Medicare
Access care anywhere in the US

Cons:

May have higher out-of-pocket costs (unless you purchase a Medigap policy)
It doesn’t cover dental, hearing, and vision care

An Overview of Medigap Policies

Medigap policies are designed to cover costs not covered by Original Medicare, such as copayments, coinsurance, and deductibles. As the name implies, it fills in the gaps of your health coverage.

There are ten federally approved Medigap plans, labeled A-N, each offering different levels of coverage. The more coverage a plan has, the higher the costs, and vice versa. A good rule of thumb to follow is to shop based on the coverage you need, not the cost. If your health takes a spiral, the last thing you want is to be drowning in medical bills.

Pro tip: The best time to buy a Medigap plan is usually when you first enroll in Medicare.

Medicare and Retirement Planning

Understanding Medicare is crucial for pre-retirees as they approach this new phase of life. From navigating the various parts of Medicare to choosing the right supplemental coverage, there are many decisions to make that could impact your retirement income and long-term health.

Medicare experts can explain healthcare costs, including premiums, out-of-pocket expenses, potential long-term care, and different plans, in detail to ensure you pick the right plan. But don’t overlook your retirement plan. A financial advisor, like the experts at Michael Brady & Co., can help you create a strategy that fits your unique healthcare and financial needs in retirement. Get in touch with our team today to get started!