Even With Medicare, Health Costs Run High

(Dow Jones) Health care is one of the biggest costs to plan for in retirement, even with the federal Medicare program providing basic coverage to Americans age 65 and over.

That's because Medicare beneficiaries can face substantial out-of-pocket costs, and the program doesn't cover long term-care needs beyond a brief transition period. There are three major parts to Medicare that cover hospital stays, doctor visits and prescription drugs--plus myriad choices to make about the timing and selection of benefits, especially if you're lucky enough to enter retirement with continuing health coverage from your employer or union.

There's also the option of choosing a supplemental Medicare policy called Medigap to cover out-of-pocket expenses, or an alternative known as Medicare Advantage that combines multiple parts and offers additional benefits. Beyond Medicare, another choice is whether to buy private long term-care insurance in case you need ongoing nursing-home care or home health care later on.

So how do you know what's essential to defraying your health-care costs in retirement and what you can live without or at least delay deciding on?

That depends on your individual employment and financial situation and your personal preferences, experts say.

The process of enrolling in Medicare offers a way into the evaluation, said Joe Baker, president of the Medicare Rights Center, a nonprofit consumer service organization in New York.

"There are basically two ways to take care of the high cost-sharing in the Medicare program: One is by buying a private Medicare supplemental [policy] if you want to stay in the fee-for-service program," he said. "Or you can go into Medicare Advantage, primarily an HMO, which can combine the benefits of traditional Medicare and Medigap."

Choosing A Plan

Three out of four beneficiaries opt for traditional Medicare fee-for-service. Baker said he generally recommends that such people also shop around for a Medigap policy, which provides comprehensive coverage except for prescription drugs. Some Medigap plans have high-deductible options.

"A lot of people when they turn 65 still can be very healthy and might only go to a doctor once a year. They say, 'Why should I pay $225 a month for a Medigap policy?'" Baker said.

There are two reasons to take the plunge, he said. "One is you never know what health crisis is around the corner. The other reason is you have to know what the rules are in your state. Just because you need Medigap later doesn't mean you'll be able to get it."

Medicare Advantage plans can be cheaper, but it's important to read the fine print and shop around, Baker said. "You need to consider whether or not the co-pays will actually add up to the same amount of premium for the Medigap."

People with retiree coverage from an employer need to ask how it relates to Medicare since many employer plans work only with traditional Medicare fee-for-service, Baker said.

Paul Gada, personal financial planning director for Allsup, a Belleville, Ill., company that offers people guidance with Medicare and Social Security Disability issues, said he's a fan of Medicare Advantage plans, especially for Medicare beneficiaries with a disability.

"You can change your Medicare Advantage plan every year if you want," he said. "You can't necessarily do that with Medigaps. After the initial enrollment period, they're not required to take you.

"The limitation of the Advantage plans is they are not necessarily national in terms of coverage," he said. "They are generally regional."

Still, some Medicare Advantage private fee-for-service plans are more portable, which can be appealing to retirees who split their time between two residences, but not all doctors accept it, Gada said.

An 'Eye-Opening Experience'

The window that people newly eligible for Medicare have for making their initial selections in the program can seem long--it starts three months before their 65th birthday and ends three months after--but it's important not to procrastinate given the complexity of the job, Gada said.

"That first enrollment period is really an eye-opening experience for people," he said.

For help wading through the options, try these resources:

The Medicare Rights Center offers a comparison tool at www.MedicareInteractive.org and a toll-free number for personalized help: 800-333-4114.

The Centers for Medicare & Medicaid Services offers comparison tools at www.Medicare.gov.

The National Association of Area Agencies on Aging can help you find local AAA resources at www.n4a.org.

Allsup at www.allsup.com offers individuals a Medicare advisory service for $200.

State insurance departments offer information on Medigap plans.

Where The Costs Are

Medicare Part A covers hospitalization and in-patient services. It's premium-free for people who've worked in the U.S. for at least 10 years and therefore have paid Medicare payroll taxes, but there is a substantial deductible, this year set at $1,100.

Medicare Part B covers doctor visits and other outpatient services, and most people have to pay a monthly premium. In 2010, most Americans who already are taking part in Medicare and don't qualify for financial assistance will pay $96.40 a month in Part B premiums while most new enrollees will pay $110.50 a month. Premiums are typically deducted from beneficiaries' Social Security benefits. Like Part A, Part B requires beneficiaries to meet an annual deductible and pay coinsurance.

Medicare Part D is administered by private insurers, and the average monthly premium is $30, according to the Centers for Medicare & Medicaid Services. Scrutinizing the plans' formularies, or list of covered drugs, when comparing plans is key for protecting your personal finances. Beneficiaries who have significant drug costs should prepare for sticker shock because the program includes a coverage gap known as the doughnut hole.

In 2010, enrollees have to dig into their pockets to cover the full cost of their prescriptions once they hit about $2,800 in total spending during the plan year. Coverage doesn't kick back in until costs reach about $6,400.

Provisions in the health-reform bills that lawmakers are trying to reconcile would narrow or even eliminate that gap, with President Obama promising drug discounts of up to 50% in 2010 if the law is passed.

Unlike Medicare Part B, which typically has a penalty for late entrants, you're not considered late with Part D if you're getting qualified coverage from your employer, said Rich Fuerstenberg, a Princeton, N.J., principal with Mercer, a consulting firm.

"Employers are required to tell you annually whether or not your coverage qualifies," he said, noting employers also have to disclose that information upon request.

So a person with a certificate of qualifying coverage who waits until she's age 70, for example, to pick a Part D drug plan won't have to worry about paying penalties.

"As long as you have that certificate in hand, you will not be assessed a penalty when you do elect Part D coverage," Fuerstenberg said.

People without such "creditable" coverage from their employers who wait to enroll in Part D could face higher premiums when they do sign up--about 1% more per month.

Considering Long-Term Care

The prospect of suffering from a slow degenerative disease is hardly what active people planning for retirement want to focus on. But it pays to give the subject some thought since some may end up leaning on unpaid family caregivers or home health aides to help them remain in their homes as they age.

More than 10 million Americans, or almost 5% of the adult population, need long-term services and supports to get through the day, according to a 2009 report from the Kaiser Family Foundation. Those numbers are expected to balloon as the baby boom generation advances into old age.

Medicaid, the joint federal-state government program for the poor, is the biggest payer of nursing-home expenses, but middle-class people have to "spend down" their assets to qualify. Assisted-living facilities are a relatively new option for people who need help with activities of daily living but don't require skilled nursing. They can be pricey, too.

"We really don't have a long-term-care system in this country," said David Certner, legislative policy director for AARP. "It's really more ad hoc."

People typically pay for long term-care expenses through their personal savings, a private long-term-care insurance policy if they can afford one or by tapping their home equity in the form of a reverse mortgage, Certner said. AARP sells a branded long term-care insurance policy with Genworth Financial.

People considering private long term-care insurance are wise to compare products when they're still relatively young since premiums are more expensive the older a person is. Some of the key questions to ask are whether the policy contains inflation protection, if there's a waiting period before it kicks in and whether it covers a mixture of both nursing-home care and home care, Certner said.

"Are you buying a daily or monthly benefit?" he said. "What length of time are you buying for? Are you getting care that lasts two years or six years or a lifetime? Obviously, the more you're buying the more it's going to cost you."

Both health-reform bills that passed Congress contain a provision that would create a nationwide long term-care insurance benefit with premiums financed by voluntary payroll deductions. Participating individuals could use the cash benefit to pay for an array of in-home supports and services or institutionalized care.