When turning 65, many people make the mistake of assuming Medicare will cover most or all of their health care costs when they retire, and that, if they need nursing home care, that Medicaid, the health care program for the poor, will cover them. However, neither program alone can guarantee a low-cost ride when it comes to paying for your medical expenses throughout retirement.
Recent studies have shown that seniors can expect Medicare to cover only about half of their medical expenses, on average. In fact, Fidelity Investments estimates that the average senior retiring at age 65 in 2009 will need $240,000 to pay the out-of-pocket costs of health care for the rest of his or her life.
It comes as no surprise that seniors spend more per capita on out-of-pocket health care expenses than any other age group. That said, the 2004 National Health Expenditure Survey offers several eye-opening numbers:
- Seniors age 65 and over spent an average of $4,888 per capita annually out of pocket for deductibles, copayments, premiums and other health care expenses not covered by insurance.
- Their spending is more than twice as high as the average nonelderly adult.
- The largest expenditures occurred among those 85 and older, who spent an average of $8,304, compared to $5,066 for seniors ages 75 to 84, and $3,851 for those 65 to 74.
There are three main costs for seniors in a Medicare program. Medicare Part A, which covers inpatient hospital stays and rehabilitation, is paid for through all employees’ payroll taxes, with seniors having to pay co-pays and deductibles for service received. Medicare Part B mainly covers outpatient (non-hospital) physician services and is partially paid for through premiums deducted from seniors’ Social Security benefits checks.
Medicare Part D, the prescription drug benefit enacted late in 2005, is provided by private insurance plans and approved by Medicare. Premiums vary based on your plan and geographic area, but the monthly average is about $24 and the average out-of-pocket deductible for 2009 is $295. However, there is the appropriately named “donut hole” in Part D plan benefits that causes seniors who have used $2,700 in drug benefits to pay the full cost of drugs until they spend a total of $4,350 out of pocket.
Most seniors will also chose to add a Medicare Supplement, or “Medigap,” policy to help pay for expenses not covered by Medicare Parts A or B. Many lower-income seniors turn to Medicare Advantage plans offered by private insurers, often with no premiums.
Since Medicare does not cover long-term nursing home care, many seniors in need of long term care end up depending on Medicaid. Medicaid, in fact, picks up the tab for approximately 42 percent of nursing home costs. However, seniors must meet income and asset requirements, which vary by state. Many seniors deplete their assets to qualify. For instance:
- Seniors eligible for Medicaid long-term care benefits can keep a house and a car – but their home equity cannot exceed $500,000.
- Their financial assets cannot exceed $2,000 for singles and $3,000 for couples.
- They cannot have transferred assets to other family members within five years of applying for Medicaid.
To discourage beneficiaries from hiding assets, new federal laws have expanded the assets counted in determining eligibility. However, at-home spouses are allowed a monthly income of 200 percent to 300 percent of the poverty level.
Some states have implemented private-public long-term care partnership programs. Seniors purchase a minimum level of private long-term care insurance. If their private coverage runs out, Medicaid will cover their long-term care costs without requiring them to spend down all of their assets. Medicaid nursing home care is not for those who want to maintain a higher standard of living or leave some assets to their heirs.
However, there is little incentive for individuals to purchase private long-term care insurance, and few benefit from the current tax deduction:
- At the federal level, private long-term insurance premiums are only partially tax deductible, and only if out-of-pocket health expenses exceed 7.5 percent of the filer’s adjusted gross income.
- IRS rules allow a larger portion of the premium to be deducted as the age of the senior increases, limited to $3,980 annually after age 70.
Seniors should look for ways to reduce their health care expenses. Many seniors can avoid the Part D coverage gap by visiting the www.Medicare.gov site use to estimate their monthly costs for drugs and premiums under different Part D plans. The site also offers suggestions for therapeutic substitutes that may cost less than prescription drugs.
For health care other than prescriptions, seniors should consider a Medigap Insurance / Medicare Supplement insurance, or a Medicare Advantage plan for seniors in lower income brackets. If you are not yet 65, you should begin planning for your health care during retirement using a tax free account such as a Health Savings Account that can provide current workers with incentives to partially prepay future Medicare costs through savings.
Wiley Long is founder and president of Medigap Advisors, and is passionate about helping people navigate the confusing waters of Medicare. He is the author of The Medicare Playbook: Designing Your Successful Health Coverage Strategy, a clear and simple explanation so you can make the most of your Medicare coverage. For more information visit www.MediGapAdvisors.com.