Outsmart Health-Care Costs

12/24/2012 7:00 am EST

Focus: RETIREMENT

Health-care coverage is getting complicated, especially as you near retirement, but there are some simple things you can do to keep ahead of the challenges the current health-care model presents, notes Bob Carlson of Retirement Watch.

Paying for medical care is the greatest fear of retirees and pre-retirees. Curiously, most of them aren't doing much about it.

The same surveys that report Americans are concerned about retirement medical expenses also report that only about 12% take account of medical costs in their retirement planning. More than half admit to knowing very little about Medicare.

What's remarkable is that even people already retired underestimate their current and future medical expenses. When asked, most underestimated their costs by about 50%, according to a study by Nationwide Financial. Most guessed at the answer rather than making any calculations or doing research.

On average, medical expenses will rise from 5.64% of total spending from ages 45-54 to 11.88% from 65 to 74 and 15.08% at ages 75 and older, according to the Bureau of Labor Statistics.

You're going to have substantial out-of-pocket medical expenses in retirement. The average person covered by Medicare annually will pay more than $4,300, or $8,600 per couple, for out-of-pocket medical expenses, according to the Center for Retirement Research at Boston College.

A healthy 65-year-old male will pay cumulative expenses, including premiums, of over $369,000 over the rest of his life. Since women live longer, the average woman will pay 13% more, or $417,000. These are only medical expenses; they don't include long-term care costs.

Fidelity Investments develops annual estimates that are somewhat lower, estimating a total of $230,000 lifetime expenses for a 65-year-old couple. But Fidelity assumes each spouse lives only to average life expectancy, and excludes costs such as over-the-counter medicines and dental care.

Remember, these are the averages. About half the people will spend more, and some will spend substantially more. Studies also point out that you don't reduce expenses much by taking care of yourself and living longer. You'll incur more routine expenses, and you're more likely to need long-term care.

Most of us can't count on former employers providing retirement medical coverage, and many of those employers that do provide coverage have steadily reduced it over the years. For most of us, Medicare is the major source of retirement medical insurance. But here are some facts about Medicare that surprise many people:

Medicare premiums are set to cover 25% of the estimated costs of the program each year. So they rise faster than the rate of consumer price inflation. Most people have Medicare premiums deducted from their Social Security benefits.

Medicare premiums are taking a bigger share of Social Security benefits, because the Social Security COLA has been less than the Medicare premium increase. In 2012, Medicare Part B premiums took 8.2% of the average Social Security benefit; in 2000, the premiums took only 5.1% of benefits. Since 2001, average Social Security benefits rose 31%, while Part B premiums doubled. That's likely to continue for at least the next few years.

Since 2007, higher-income taxpayers have paid higher Part B premiums, with the levels rising as income rises. Means-testing of this type also applies to the Part D Prescription Drug program, and probably will be a bigger part of the program in coming years.

In addition to premiums, you pay deductibles and co-payments for most covered care. There also are limits to what Medicare will pay for some types of care. You pay for the rest.

There are many types of care not covered by Medicare. Part A covers hospital expenses, and you pay no premiums. Part B covers doctors' care and basic medical care, and you pay premiums. You can sign up and pay a premium for a supplemental policy, or Medigap policy, that will cover some of the care not covered by Medicare. You also can sign up for a Part D plan that will cover some prescription drugs not covered by Parts A and B.

Even so, most vision and dental care isn't covered, and there are other coverage gaps you'll have to pay out-of-pocket. For some treatments, such as medical devices, Medicare might not pay for the quality or features you prefer.

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The Affordable Care Act (also known as Obamacare) makes parts of Medicare more attractive and parts less attractive. Insurers are reimbursed less for Medicare Advantage plans than in the past. As a result, members are paying higher premiums, deductibles, and copayments, or receiving fewer benefits or a combination of these.

The ACA attempts to slow the growth in the cost of medical care by limiting the increases in payments to doctors, hospitals, and other providers. But Congress historically hasn't let such limits stick. If it does, you'll find fewer providers willing to take Medicare patients, so it could be a mixed result.

The "doughnut hole" in Part D prescription drug plans is closing over time. Originally, Part D policyholders had to pay 100% of prescription costs over a certain amount ($2,093 in 2012) up to a ceiling amount ($4,700 in 2012). This coverage gap will close by 2020.

Also in 2012, Part D members in the doughnut hole pay only 50% of the cost for brand-name drugs and 86% for generic drugs. By 2020, they'll pay 25% only for both types of drugs after reaching the deductible for their policies.

Most preventive care and screening essentially is free under Medicaid beginning in 2011. The usual deductibles and 20% coinsurance don't apply.

Medical expenses are a big reason why a recent study found that many Americans when they pass away have only about $10,000 in assets. They spend down their assets on medical expenses and long-term care. But you don't have to live in fear of retirement medical expenses or have them chip away at your financial well-being. Follow this plan.

Budget for medical expenses. It's not easy to forecast lifetime medical expenses, because your future health is unknown. But don't assume they'll be the same as during your working years.

Understand the difference between employer coverage and Medicare. Know the rules about premiums, deductibles, and coinsurance. Also, know which care isn't covered. Then, prepare a forecast of medical expenses that is separate from your other spending plans.

Review the options. Almost everyone has Medicare Parts A and B. In Part B, you can choose between traditional Medicare and Medicare Advantage.

Also consider whether you should have a Medicare supplement policy to fill the gaps in traditional Medicare. If you opt for traditional Medicare, also consider a Part D prescription drug policy. Finally, consider buying long-term care coverage.

Don't miss the deadlines. You'll face a coverage gap and higher lifetime premiums if you don't sign up for a Medicare part or buy a policy when you're first eligible. For Parts A and B, you'll be enrolled automatically at age 65 if you're receiving Social Security.

If you're not, you need to apply for Part B and buy a Part D policy (if you want one) during the period that begins three months before your 65th birthday and ends seven months after. But the enrollment dates are extended if you're working for an employer with 20 or more employees, or have retiree health coverage from a former employer. Know your deadline and don't miss it

Extend your career. Staying in the workforce longer provides at least two benefits. You keep earning money, and so you can keep adding to your nest egg instead of draining it. Some people work an extra two or more years and earmark all of the additional savings for lifetime medical expenses.

Working longer also means you don't retire before age 65, and won't have to seek coverage to fill the gap between your former employer's coverage and when Medicare begins at 65.

Remember inflation. Overlooking inflation is the most common retirement planning mistake. The problem is more acute for medical expenses, because their rate of inflation is higher than for consumer prices.

Shop for coverage. In Part B, you can choose between traditional Medicare and Medicare Advantage. In most areas, you have a choice of Medicare Advantage plans. There also are a wide range of Medicare supplemental plans (Medigap plans) to consider. In most areas there also are numerous Part D prescription drug plans.

The terms and costs of these options are very different. The right plan for you depends on how well the coverage suits your medical profile and the cost. Too often, people are paying much more than they need to for medical care because of they don't shop for the right policy. Or they pay too much for a policy because a similar policy is available for less.

Medicare makes shopping around easier on both its Web site (www.medicare.gov) and 800 number 800-MEDICARE (800-633-4227). You can find my details about the different Medicare options, how to choose among them, and deadlines in the member's section of Retirement Watch and in my books (with Eric Tyson) Personal Finance for Seniors for Dummies or The New Rules of Retirement.

Don't hesitate to seek help from either Medicare, a seniors agency, or tax-exempt group in your area, or from a financial planner.

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