Almost all Americans who work pay into the Medicare system, but not everyone knows about the benefits they will become eligible for when they turn 65. Here's a look at the valuable health insurance you will get in retirement:
Tax rate. Most workers pay 1.45 percent of their earnings into the Medicare trust fund, and companies pay a matching 1.45 percent per employee. Self-employed workers pay 2.9 percent of their earned income into the trust fund. Beginning in 2013, the Affordable Care Act enacted an additional Medicare tax equal to 0.9 percent of earnings over $200,000 for individuals and $250,000 for couples.
When to sign up. You can sign up for Medicare beginning three months before you turn 65, and coverage can start as soon as the first day of your birthday month. The initial enrollment period lasts until three months after your 65th birthday. If you fail to sign up during the seven-month window around your 65th birthday, you can sign up between January 1 and March 31 each year (and get coverage that begins on July 1), but you may be required to pay permanently higher premiums for late enrollment. Monthly Part B premiums increase by 10 percent for each 12-month period you were eligible for Medicare but didn't sign up for it. If you or your spouse is employed and covered by a group health plan at work, you must sign up within eight months of leaving the job or the coverage ending to avoid the higher premiums. "It's really important to plan in advance and to sign up during that time," says Nicole Duritz, vice president for health and family at AARP. "If you choose to sign up later, it will end up costing you more."
Premium costs. Most retirees don't pay a premium for Medicare Part A hospital insurance. The standard premium amount for Medicare Part B medical insurance is $104.90 per month in 2013, but retirees who earn more than $85,000 ($170,000 for couples) pay higher premiums.
Other out-of-pocket expenses. Just as with private health insurance, Medicare has deductibles, copays and coinsurance. The Part B deductible is $147 in 2013, after which Medicare typically pays 20 percent of the Medicare-approved amount of the service. There's no annual limit on what you might need to pay out-of-pocket.
Supplemental coverage. It's difficult to predict how much your out-of-pocket costs will be with traditional Medicare, so many retirees supplement their Medicare coverage with a Medicare Advantage or Medigap plan. These plans charge an additional premium, but fill in many of Medicare's cost-sharing requirements and sometimes cover additional services that traditional Medicare doesn't cover. "For many people, purchasing a Medigap policy will give people some peace of mind that those expenses will be covered if they have very high medical expenses," says Juliette Cubanski, a Medicare policy analyst at the Kaiser Family Foundation. There is a one-time Medigap open-enrollment period that starts the month you turn 65 and enroll in Part B and lasts six months. During this period, you have a guaranteed right to buy any Medigap policy sold in your state regardless of your health condition. After this period, you could be denied coverage or pay higher premiums. "No one can say no to you, no matter what your health status is during that six-month period," says Duritz. "After that six months, there is no guarantee that a plan will accept you and offer you a supplemental plan."
Free physicals. You can get a free "welcome to Medicare" preventative care doctor's visit during the first 12 months that you have Medicare Part B, which generally includes a review of your medical history and recommendations about preventative care. Once you've had Medicare for a year, you become eligible for annual wellness visits to a doctor to make a personalized plan to prevent disease. "The new 'welcome to Medicare' physical exam gives people an opportunity to get a check-up and get a run-down of all the prevention benefits that they might be entitled to," says Cubanski. "It's a nice opportunity for people when they come on to Medicare to get into the system and perhaps into a plan of prevention and health promotion that they might not have had an opportunity to take advantage of prior to signing up for Medicare."
Free preventative care. Many preventative services are now covered without a deductible or other cost-sharing requirements, due to provisions of the Affordable Care Act, including bone mass measurements and breast cancer screenings. But additional costs could be charged if a problem is found. For example, colonoscopies are covered at no cost, but if a polyp is found and removed during the colonoscopy, you may then have to pay 20 percent of the Medicare-approved amount for the doctor's services and/or a copayment to the medical facility.
How to pick a Part D plan. Retirees get to choose a new Medicare Part D prescription drug plan each year during an annual enrollment period from October 15 to December 7. It's a good idea to shop around for a new plan even if you're happy with your current coverage because premiums, covered medications, out-of-pocket costs and the plans offered change each year. "While you're always automatically renewed in the same plan from one year to the next, it is smart to take a look, ideally every year, to see what's happened with your own plan, whether the premium has increased and whether your needs have changed," says Jack Hoadley, a health policy analyst at Georgetown University. "You can often save money simply by making a new choice." If you don't join a Medicare prescription drug plan when you're first eligible or go without prescription drug coverage for a period of 63 or more days in a row after you qualify, you may have to pay a late-enrollment penalty. There's also a coverage gap in many Medicare Part D plans, often called the "donut hole," but the gap is scheduled to be gradually eliminated by 2020.
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What is not covered. There are a variety of medical services commonly used by older people that Medicare doesn't cover, including routine dental or eye care, dentures and hearing aids. Medicare also does not cover extensive long-term care in a nursing home or assisted living facility.
Funding deficit. The Medicare hospital insurance trust fund is expected to be depleted earlier than the Social Security trust funds. The trust fund has paid out more in hospital benefits and other expenditures than it received in income since 2008, and is projected to be exhausted in 2024, according to the 2012 Social Security and Medicare Boards of Trustees reports. Potential strategies to fix the funding shortfall include increasing the payroll tax from 2.9 percent to 4.25 percent, reducing expenditures by 26 percent or some more gradual combination of the two approaches.
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