Week 13: Taking the Pain Out of Medical Costs

Course Progress:

“Getting older is no problem. You just have to live long enough.” — attributed to Groucho Marx

I hope you’re sitting down for this.

A 65-year-old couple who retire in 2018 will need $280,000 to cover their health care and medical costs in retirement. That’s the conclusion of an analysis from investment firm Fidelity. That breaks down to $133,000 for men and $147,000 for women.

Looked at another way, Fidelity estimates that the average retiree will spend about $5,000 per year for out-of-pocket expenses and health insurance premiums. That’s a lot of money. How are you going to cover it?

Before you clock out of the workplace for good, have a plan for how you’ll pay these expenses. And line up the best insurance policy you can.

That’s this week’s lesson: the last big piece of the retirement readiness puzzle. We’ll talk about managing your medical costs before and after you are eligible for Medicare and look at strategies for covering the cost of long-term care.

Let’s get started.

Health insurance options before Medicare

Once you turn 65, you’ll likely get access to Medicare. The government’s health insurance plan for seniors provides pretty darn good coverage at an affordable price. We’ll discuss that in depth a little later.

Read: “7 Facts You Need to Know About Medicare”

While you can take Social Security payments as early as age 62, there’s no way to get Medicare early unless you’re disabled. Early retirees need to find another way to cover medical costs until age 65.

Here are five options:

1. Check your retiree benefits.

Retiree health care benefits are dying off almost as fast as pensions, but a quarter of large firms still offered retiree health insurance in 2017, according to the Kaiser Family Foundation.

Talk to your human resources office or union. Even if retiree health insurance benefits have been discontinued for current employees, you may be grandfathered into an old plan if you’re a longtime worker.

2. Buy COBRA coverage.

Named for the Consolidated Omnibus Budget Reconciliation Act that created the option, you can continue your workplace medical insurance for at least 18 months after leaving a job. In some cases, you can buy coverage for 36 months or more.

COBRA coverage gives you the same plan you had at work, but it’ll cost you more. Employers may charge former employees up to 102 percent of the full premium price to cover administrative costs.

COBRA is convenient, and has the bonus of providing coverage you’re already familiar with, but it isn’t always the cheapest way to get health insurance.

3. Buy private coverage.

You can also buy your own health insurance coverage:

  • If you earn less than 400 percent of the federal poverty limit, check the federal Health Insurance Marketplace at HealthCare.gov. Eligible households can get government subsidies for plans purchased here. You’ll have a 60-day special enrollment period after losing your workplace coverage, so you don’t have to wait for the annual enrollment period.
  • If you’re over the income limit or would rather bypass the government system, you can buy directly from health insurers. Call companies for quotes or use an online portal like ehealthinsurance.com or insurancequotes.com to easily compare prices from several companies.
  • Also, explore professional associations and alumni groups. Many give members access to health insurance as a perk.

4. Continue working.

Don’t overlook the possibility of semi-retirement. Finding a job with reduced hours in exchange for benefits can be good for your pocketbook. It may also help avoid the boredom some retirees face when dropping out of the workforce completely.

Medicare explained

Once you reach age 65, you can start Medicare, the government-funded medical insurance plan for seniors.

Read: “22 Health Care Services You Get Free With Medicare”

Medicare has four components, Parts A, B, C and D. Each covers a different type of medical services. In short:

  • The federal government offers Part A and Part B insurance, which is also called Original Medicare.
  • Private insurance companies sell plans that either bundle and augment Medicare services (Part C, Medicare Advantage plans) or cover Medicare’s coverage “gaps,” fees like copays, co-insurance and deductibles (Medicare Supplemental insurance, also called Medigap plans).
  • Private insurers also sell prescription drug insurance (Part D).

It’s smart to do some careful shopping for Medicare plans. Your options may vary a lot, depending on where you live. And your medical needs can determine which coverage types will save you the most money. Luckily, there’s help:

Let’s look at the Medicare basics:

Medicare Part A

Medicare Part A is your hospital coverage. It pays for inpatient care, certain home health care, skilled nursing home care and hospice.

Costs: You’ll receive Medicare Part A hospital coverage free unless you did not pay Medicare payroll taxes for at least 40 quarters (10 years). In that case, you can buy Part A coverage for a premium that could be as much as $437 per month in 2019 plus a deductible. Medicare pays 100 percent of your costs for hospitalizations of up to 60 days.

Learn more about Part A from Medicare.gov.

Medicare Part B

Medicare Part B covers outpatient services — doctor visits, medical equipment, screenings and mental health care, for instance.

Costs: In 2019, most Medicare recipients will pay a monthly premium of $135.50 for Part B. High earners (with incomes over $85,000 for individuals and $170,000 for couples) pay more. Monthly premiums top out at $460.50 for 2019.

In addition to the premium, you’ll pay a $185 deductible. You’ll also be responsible for co-insurance — 20 percent of the Medicare-approved cost for most services. This is your co-insurance cost.

Medicare Advantage (Medicare Part C)

Medicare Advantage plans are an alternative to paying separately for Medicare Part A, Part B and, often, Part D. You buy a bundle of services, typically including Part D prescription drug coverage, for a single premium paid to a private health insurance company.

Advantage plans may also include additional benefits, such as vision, hearing or dental care.

While Medicare Advantage plans may have lower monthly premiums, a supplemental plan (Medigap) may save you money by covering more out-of-pocket costs.

Costs: Prices vary significantly depending on what the plan covers and how it operates. To be sure a plan is affordable for you:

  • Consider both the premiums and your expected deductibles, copayments and co-insurance.
  • Check whether the plan covers prescription drugs or if you’ll need to buy a separate Part D plan.
  • Confirm that your preferred doctors and prescriptions are covered. Most Medicare Advantage plans operate as HMOs or PPOs and pay only for services at participating providers. They may require referrals to see specialists.
  • The National Council on Aging has resources to help people shopping for Medicare Advantage plans.

Learn more about Medicare Advantage plans from Medicare.gov.

Medicare Part D

Part D pays for your prescription drugs.

If you have a Medicare Advantage plan, Part D is often rolled into the benefits. If not, you’ll need to buy Part D pharmacy coverage separately or pay for medicines, including chemotherapy, if necessary, out of your pocket.

Costs: Prices are not standard and will depend upon the level of coverage offered.

Learn more about Part D from Medicare.gov.

Medicare Supplement Insurance (Medigap) plans

If you’re planning to use Original Medicare, and not a Medicare Advantage plan, you’ll need to decide whether to purchase a supplemental policy to cover your Parts A and B copays, coinsurance and deductibles.

While Medicare Advantage plans may have lower monthly premiums, a supplemental plan (Medigap) may save you money by covering more out-of-pocket costs.

Important: Remember, coverage is guaranteed during your initial enrollment period, and prices may be lower if you act then rather than if you wait to buy later. Medicare Supplement Insurance plans, too, are sold by private insurance companies.

Learn more about Medical Supplement Insurance (Medigap) plans at Medicare.gov.

The most basic decision you’ll make about Medicare is whether you want to receive your benefits directly from the government or from a private health insurance company.

As mentioned above, getting Part A and Part B directly from the government is known as Original Medicare. Buy from a private company, and you’ll have what is known as Medicare Advantage.

I can’t tell you which one is right for you, but here’s a look at the pros and cons of each.

Original Medicare Medicare Advantage
Pros Cons Pros Cons
Accepted by all Medicare providers Lacks added benefits such as vision and dental Includes all Part A and Part B services Network may be limited, requiring you to visit only approved providers
Standard costs Will not cover most care provided outside the United States Often includes additional coverage such as Part D and wellness services Costs may be higher
Opportunity to buy a Medigap supplemental plan Requires purchase of a separate Part D plan for prescription drug coverage Opportunity to be insured by your preferred company Cannot be combined with Medigap supplemental policies

Finding the best Medicare Advantage policy

If you’ve decided to go the Medicare Advantage route, you’ll have plenty of options. In fact, your mailbox might be overflowing with brochures from insurers every fall during the open enrollment period.

To find the best plan, consider these three Cs:

  • Cost: First, you want to be sure the plan fits your budget. That means not only looking at the premiums but also considering your expected deductibles, copayments and co-insurance. Be sure to check whether the plan covers prescription drugs or if you’ll need to buy a separate Part D plan.
  • Care: All Medicare Advantage plans will cover Part A and Part B services, but their selling point is that they include other benefits. You might get vision care, dental coverage or a gym membership. You’ll be paying for all these extras so make sure they’re services you actually want and need.
  • Coverage: Most importantly, make sure your preferred doctors and prescriptions are covered. Most Medicare Advantage plans operate as HMOs or PPOs. That means they only pay for services at participating providers. You may have to get a referral to see a specialist. Don’t forget to make sure the plan will cover the specific prescriptions you use as well.
Read: “8 Services Medicare Advantage Won’t Cover Without Preapproval”

You can find and compare plans in your area on the Medicare website. The National Council on Aging also has a number of resources available for people shopping for Medicare Advantage plans.

Finding the best Medigap policy

One of the best things about Medicare Supplement Insurance plans (Medigap) is that they are all standard, and they can all be used anywhere a provider accepts Medicare payments. Currently, there are 10 plans on the market, and they are labeled with letters from A-N. (Medicare just really loves the alphabet.)

Because the plans are standardized, Plan A from Company X is exactly the same as Plan A from Company Y. You simply need to compare prices, looking for a company you trust.

Use this handy chart at the U.S. Centers for Medicare & Medicaid Services to see what you get for each of the various Medigap plans. (If you live in Massachusetts, Minnesota or Wisconsin, your options are different, so scroll to the bottom of the chart for links to your state’s plans.)

Beware these 2 costly Medicare mistakes

1. Don’t lose your waiver for pre-existing conditions

It’s important to start, well before retirement, thinking about finding a Medicare plan that will serve you not just now but also in 15 to 20 years. Medicare does give you the chance to cancel or switch plans each year during the open enrollment period. But changing plans could be a costly decision.

Here’s why: If you start Medicare with a Medicare Advantage plan, you might not be able to switch later to Original Medicare and a supplemental plan.

That’s because your initial enrollment period after you first sign up is a special moment. At that time only, you’re guaranteed coverage by Medigap (supplemental) plans, meaning that an insurance company is not allowed to look at any pre-existing conditions and deny coverage or jack up your premiums.

Once that initial period ends, however, the door opens for insurers to ask questions about your health status. You could end up paying significantly more for that private coverage, or even be barred from buying certain plans.

2. Be careful not to trigger late enrollment penalties.

Sign up for Medicare as soon as you are eligible. If not, the cost of your premiums will rise.

Everyone who is eligible for Medicare can begin coverage at age 65. At that point, you have a seven-month window to sign up — including three months before your birthday month, the month in which you turn 65 and the three months after.

Miss that window, and you’ll get hit with a late enrollment penalty for Parts A, B and D when you finally do enroll. The Part A and Part B penalty adds 10 percent to your premium for every 12 months you waited to enroll.

Late-enrollment penalties are intended to deter people from thinking they will avoid paying premiums while they are healthy and then sign up later when they need care.

The Part A penalty drops off when you reach twice the number of years you delayed. (For example, if you waited one year to sign up, you’ll pay the penalty for two years. If you waited two years, the penalty is in effect for four years.)

The Part B penalty, however, is permanent.

Part D also carries a penalty for late enrollment: 1 percent of the national base beneficiary premium. For 2019, that amount is $33.19, so the penalty is about 33 cents.

That doesn’t sound too bad. But the penalty increases every month you delay. If you wait two years to enroll, your penalty will be 24 percent of the $33.19 — $7.97 a month. Or more, if the national base premium increases.

The good news is that you shouldn’t be charged a penalty if you’re still working and have health insurance through your job. But just to be safe, contact Social Security before your 65th birthday to tell them you’re working and ask how to proceed.

4 ways to save money on medical care in retirement

Medicare can be a confusing alphabet soup, but it remains one of the most affordable ways to pay for health care costs in retirement. To keep costs down, you’ll want to do these other things as well:

1. Get care while you’re still working.

If you have a great plan at work, schedule expensive procedures now. See your dentist, get your eyes checked and visit the podiatrist before leaving the workforce. These things aren’t covered by Original Medicare.

2. Sign up for a Health Savings Account.

If you have an eligible high deductible health insurance plan, open a Health Savings Account. Contributions to the account are tax deductible, the money grows tax-free and it can be withdrawn tax-free for qualified medical expenses.

3. Stay in your network.

If you opt for Medicare Advantage, stay within your insurance company’s network of health care providers. Going “out of network” can mean significantly higher co-payments. In some cases, insurers may refuse to pay any part of the bills for out-of-network services.

4. Use generic medications.

Part D plans typically charge more for brand name prescriptions. In some cases, you may be able to get a generic for significantly less. Talk to your physician about generic alternatives for any pricey medications you take.

What about long-term care?

Remember that $280,000 figure from Fidelity? It doesn’t include dental care, ongoing nursing home, assisted living or home health care.

Statistics suggest about 20 percent of Americans will someday end up in a nursing home. And yet, only 13 percent of Americans over 65 have long-term care insurance, according to the Center for Retirement Research. Possibly because it’s so expensive.


If you’re going to buy long-term care insurance, make sure to price in costs for as long as you’ll need it.

Long-term care could easily add another six digits to your health care costs. One way to cover those costs is with long-term care insurance.

Here are a few things to know about long-term care insurance:

  • Cost differs based on what’s covered and your age; prices range from $1,500 to more than $5,000 annually for this specialty insurance.
  • According to an American Association for Long-Term Care Insurance’s 2018 report:
    • The average age for purchasing a long-term care policy is 66.
    • Some 72 percent of claims were filed by people over age 80.
    • The average claim benefit was $115,617.
  • Insurers can and do raise premiums even after you have a policy in place. More than a quarter of people who bought long-term care insurance at 65 let it lapse (losing the benefits they’d been paying for).

At first blush, long-term care coverage would appear vital. Medicare doesn’t cover long nursing home stays (although it may cover up to three months). But do you really need this insurance? There’s an ongoing debate, especially as premiums continue outpacing inflation.

For the average person, technically, it’s worth it. But it’s important to consider how many people can’t afford it, how many can but never use it, and how many may never need it.

The Center for Retirement Research concludes that long-term care insurance is optimal for only 20 to 30 percent of individuals, and that men, on average, need fewer than 11 months of such care while women average 17 months.


Medicaid, the government medical care program for those with low incomes and few assets, pays for nursing home care.

Ways to trim the cost of long-term care insurance include:

  • Limit the benefits. If you expect to stay in your home and have family members who can act as caregivers, you might be able to use a policy with limited benefits, possibly covering a part-time or occasional home health aide.
  • Raise the elimination period. This period, sort of like a deductible, is the time gap between when you are eligible for benefits and when the insurer starts paying. A three-month delay can substantially lower the cost, as can narrowing the benefit period to three to five years instead of buying benefits for life.

When shopping for long-term care insurance, read all the fine print. Look for exclusions, benefits, when the policy kicks in and how much it pays. This is a personal decision with lots of variables. To learn more, read “Should I Buy Long-Term Care Insurance?”

Other strategies for covering long-term care costs

Life insurance. Some life insurance policies offer “living benefits.” This is an option to receive a portion of the death benefit in advance for long-term care or in the event of a terminal diagnosis. Some specialty life insurance products are even designed with this use in mind and sold as hybrid life/long-term care policies.

Reverse mortgage. If you have equity in your home, you may be able to take out a reverse mortgage to cover the cost of care. These mortgages typically require the sale of the property after the homeowner’s death in order to pay off the loan.

Health Savings Account. If you have a Health Savings Account, some long-term care costs may be qualified medical expenses. That means you can use money from your account to pay for that care with tax-free dollars.

You can also pay long-term care insurance premiums out of a HSA. Note, however, you can’t contribute to an HSA once you’re enrolled in Medicare — you can only spend the funds already in one.

Veterans Administration. If you or your spouse are a veteran, you may be eligible for long-term care benefits through the Veterans Administration. Learn more here, at the Department of Veterans Affairs, and contact your local VA office.

Medicaid. Once you run out of money and assets, state Medicaid programs will pick up the bill for your care. The downside is that not all facilities participate in Medicaid, and you may be stuck somewhere you don’t want to be.

You’ll also have to spend down your assets before qualifying for Medicaid. See “Can I Protect My Money If I Go Into a Nursing Home?”

Your tasks for this week

This is what I’d like you to do this week:

  1. If you’re retiring before 65, talk with your human resources office about your retirement benefits. If retiree health benefits aren’t an option from your employer, get a quote on COBRA coverage. Then, decide how you’ll cover your medical costs until you are eligible for Medicare.
  2. Make a note of your Medicare eligibility window so you don’t get hit with penalties for missing the window to sign up. Mark your calendar at the three months before your 65th birthday, the month you turn 65 and the three months after.
  3. Decide if you’ll use Original Medicare or Medicare Advantage. Start researching available plans now so you won’t be making a rush decision once you’re eligible to enroll.
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