U.S. News & World Report: The Unexpected Costs of Medicare
With a little planning, seniors on Medicare can minimize their out-of-pocket expenses.
By Joseph P. Williams Oct. 15, 2014 | 8:00 a.m. EDT
Created in 1965, Medicare was intended to answer growing reports of impoverished seniors languishing or dying because they lacked health insurance. Since then, Medicare has acquired a reputation as the ultimate government entitlement, a system of low-cost, taxpayer subsidized health care provided at the stage in life when retirees need it most.
But the broad-reaching health care insurance system comes with costs that many seniors – including those already using the plan – don’t see until the bills show up. Those out-of-pocket expenses, according to experts, can range from hundreds of dollars in monthly premiums and office visit copays to six-figure bills for surgery and hospitalization for things like joint-replacement operations, a procedure common among older Americans.
Those costs, which add up quickly, can stress or even break a household budget, particularly for retirees getting by on fixed incomes. Even declining to sign up for Medicare when you first become eligible, experts say, can cause a lot of pain in the wallet later on.
“A lot of people looked at Medicare as this Promised Land – ‘Everything is covered, until the end of time,'” says Nicole Duritz, vice president of health education and outreach for AARP, a nonprofit advocacy group. “I don’t think people have a great understanding of how the system works. They’re surprised at how much they’ll have to contribute.”
Compared to individual or group health insurance plans, “Medicare is unique in that it has no out-of-pocket spending limits,” says Nancy Metcalfe, a health policy analyst at Consumer Reports.
That’s because Medicare plans are typically private health insurance policies that are government-subsidized. Nothing is completely covered, and no expense is 100 percent paid for. Though the subsidies paid to the insurance companies help keep costs low for seniors, the plans vary and usually require beneficiaries to pay some premiums.
There’s good news, however: Metcalfe and others say a little planning, homework and realism can go a long way toward helping Medicare consumers keep more of their hard-earned money in their pockets.
That means seeing past the monthly premium payment to take a hard look at what may be some uncomfortable things – including a realistic assessment of your finances, anticipating how healthy you’ll be during your sunset years and choosing what services you might need in a worst-case scenario.
According to the Center to Preserve Medicare, in 2013, about 41.8 million seniors were covered by Medicare Part A, which covers hospitalization; 38.7 were beneficiaries under Medicare Part B, which covers routine medical care; and 37.4 million also used Medicare Part D, which covers prescription drugs. While the federal government reports that Medicare spending overall is down and that reforms under the Affordable Care Act – also known as Obamacare – has further reduced costs, seniors may experience sticker shock when it comes to what they have to pay.
Consider hospitalization costs for, say, a broken leg.
According to Medicare.gov, the government’s official website, Medicare Part A generally covers most of the bills associated with that type of a hospital stay, including a semi-private room and medical procedures. But it doesn’t cover incidentals like hospital room TV or phone service, which can run as high as $50 per day.
Moreover, there are deductibles: Part A beneficiaries must pay $1,216 for the first 60 days of that hospitalization. For stays that last longer than two months – extremely rare, but sometimes necessary for serious conditions like cancer – patients without coinsurance have to pay more than $300 per day.
“If you need long-term care, it’s not covered,” Metcalfe says.
Part B subscribers have coverage for outpatient doctor visits and medically necessary procedures and surgeries, according to Medicare.gov. But the copay percentages and deductibles for treatments or hospital visits, Metcalfe points out, aren’t free.
“For example, if you get a $1,000 bill for an X-ray or a CAT scan, you’ll pay 20 percent of that,” or about $200, Metcalfe explains. “But if you get a $100,000 bill for chemotherapy, you’re paying $20,000.”
Additionally, if your individual income is less than $85,000 per year, your monthly premium would be $104.90. But if you earn more than $85,000 a year, Part B premiums are determined on a sliding scale that starts at $147 a month and could go up to $335 a month. There are also penalties for people based on their tax history, or whether they subscribed to employer- or union-sponsored health care while they were in the workforce.
And then there’s the infamous Medicare Part D “donut hole” – where prescription drug coverage runs out but before “catastrophic” drug coverage begins. For 2014, you hit the coverage gap when you spend $2,850 on drugs covered by your plan. For 2015, the amount rises to $2,960, according to Medicare.gov. The gap is shrinking and should close by 2020, but until then seniors will have to pay the difference themselves.
AARP’s Duritz says there are ways seniors can bridge the gaps in coverage, including purchasing Medicare Advantage, a privately administered health policy that works like a preferred-provider or HMO plan that offers prescription drug coverage. The premiums can be higher, but companies keep out-of-pocket costs low by requiring treatment at an in-network hospital or care provider, which limits some options. Medigap – a supplemental policy that covers some of the things that Medicare Parts A, B and C don’t – is another option. Administered by private companies, it also travels with the policyholder, but there are restrictions – including having to buy Medicare Part B and separate Medigap policies for each family member.
One of Medicare’s hidden costs kicks in if you don’t sign up for coverage when you’re first eligible. Seniors who wait too long to get coverage have to pay higher prices. In Part D, for example, the premium goes up 1 percent a month for every month an eligible person stays out of the system.
“Some people who are 65 and healthy, still working and don’t take very many drugs say, ‘Why would I sign up for Medicare? Why would I want to do that?'” Metcalfe says. “Well, here’s why.”
If you skip the open enrollment period because you assume you’ll stay healthy, and then “all of a sudden you’re taking three or four drugs a month,” enrolling in Part D becomes much more expensive, Metcalfe says. “It’s a thing that blindsides people. They make this mistake over and over again.”
The key, she says, is planning – and making a realistic assessment of your health and what you might need. She adds that it’s important to do your homework, talk with your doctor and read the “Medicare and You” handbook that the government regularly issues to eligible seniors.
“A lot of mistakes people make could have been avoided if they read it,” she says. “It’s long, but it’s written in big print, and it’s in plain English.”
Updated on Oct. 15, 2014: This article was originally published on Oct. 18, 2013 and has been updated to reflect new costs.