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Healthcare in retirement: What you need to know

At a glance:

  • Medicare

  • Medicare supplement insurance (Medigap insurance)

  • Long-term care insurance

  • Benefits under long-term care insurance

  • What to consider when buying long-term care insurance

  • Summary of healthcare in retirement

Although many folks project decreased living expenses when planning for retirement, the cost of healthcare is likely to be the exception.

Healthcare costs have significantly outpaced the overall inflation rate for years, and recent studies show retiree medical bills have increased about 6% per year for the past decade — even for those on Medicare.

This article is an introduction to Medicare, Medicare supplement ("Medigap") insurance, and long-term care (LTC) insurance — the types of healthcare insurance on which many of us will rely as we enter the retirement years.

It's important to understand at the outset that Medicare is far from a total solution to a retiree's healthcare needs. A typical couple entering retirement at age 65 can expect to pay well over $200,000 out of pocket for care of one sort or another throughout the rest of their lives.

Medicare

Medicare is the nation's largest health insurance program, providing high-quality health care to people 65 and over (as well as limited other groups of disabled people).

Medicare is administered by the Centers for Medicare and Medicaid Services (CMS), part of the Department of Health and Human Services (HHS).

The different parts of Medicare help cover specific services:

Part A

Medicare Part A (hospital insurance) helps cover inpatient care in hospitals and skilled nursing facilities, hospice, and home health care. Most people pay no premium for Part A coverage. There is a significant deductible, as well as a co-payment for hospital stays of over 60 days.

Part B

Medicare Part B (medical insurance) helps cover the services of physicians and other healthcare providers, outpatient care, durable medical equipment, and home health care. Part B also helps cover some preventive services to maintain good health or to keep certain illnesses from getting worse. There is a premium for Part B coverage. Once a modest deductible has been met, Part B typically covers 80% of approved services, while the remaining 20% is paid by the patient.

Traditional Part A and Part B coverage apply to a large majority of Medicare enrollees. The government directly pays the healthcare provider you select, provided he or she accepts Medicare patients.

SARASOTA, FLORIDA - JANUARY 04: Charles Miller, 90, prepares the daily pills his wife will need for the week on January 4, 2020 in Sarasota, Florida. His wife has had a recent stroke and a heart attack, and needs approximately ten different medicines daily which need to be carefully monitored. (Photo by Andrew Lichtenstein/Corbis via Getty Images)
Charles Miller, 90, prepares the daily pills his wife will need for the week on January 4, 2020 in Sarasota, Florida. (Photo: Andrew Lichtenstein/Corbis via Getty Images)

Part C

Medicare Part C (also known as Medicare Advantage) is an alternative means of delivering the care and services provided by Parts A and B. Medicare Advantage offers health plan options run by Medicare-approved private insurance companies, i.e., the federal government pays for private health coverage.

Most Medicare Advantage plans also include the prescription drug coverage offered by traditional Medicare Part D, and some Medicare Advantage plans may include extra benefits for an extra cost.

Part D

Medicare Part D (prescription drug coverage) helps cover the cost of outpatient prescription drugs solely through private insurance plans. These may be standalone prescription drug plans or a part of a Medicare Advantage plan that offers a prescription drug benefit.

How are these parts paid for?

Part A largely is funded by revenue from a 2.9% payroll tax levied on employers and workers (each pay 1.45%). As of 2013, the 2.9% hospital insurance tax applies to the first $200,000 of earnings for individuals or $250,000 for couples filing jointly, but will rise to 3.8% on earnings in excess of those amounts. Unlike the Social Security tax, there is no ceiling on the income on which the Medicare tax is paid. Parts B and D are funded primarily by premiums paid by Medicare enrollees.

Despite the breadth of the various Medicare coverages, there are significant out-of-pocket expenses to be borne by enrollees, such as Medicare premiums, deductibles, and co-payments, as well as dental, hearing, and vision care, none of which are covered by traditional Medicare at all.

More information on Medicare costs can be found here.

Medicare supplement insurance (Medigap insurance)

A Medigap policy is a type of private insurance that helps you pay for some of the costs that original Medicare doesn't cover. You must have Medicare Part A and Part B to buy a Medigap policy.

What does it do?

A Medigap policy is health insurance sold by private insurance companies to fill gaps in original Medicare coverage. Medigap policies can help pay your share of the costs of Medicare-covered services, e.g., coinsurance, copayments, and deductibles. Some Medigap policies also cover certain benefits original Medicare doesn't cover.

It's important to understand that Medigap policies do not cover your share of the costs under other types of health coverage, including Medicare Advantage plans or private or group health insurance policies.

Policies must abide by certain laws

Every Medigap policy must follow federal and state laws designed to protect you, and the policy must be clearly identified as "Medicare supplement insurance." Medigap insurance companies in most states can only sell you a "standardized" Medigap policy identified by letters A through N.

Insurance companies that sell Medigap policies don't have to offer every Medigap plan. However, they must offer Medigap Plan A (the most basic plan) if they offer any Medigap policy at all. If they offer any plan in addition to Plan A, they must also offer Plan C or Plan F (the most comprehensive plans).

Each standardized Medigap policy must offer the same basic benefits, no matter which insurance company sells it. In other words a Medigap Plan C policy offered by Insurance Company 1 must offer the same benefits as a Medigap Plan C policy sold by Insurance Company 2.

Therefore, cost and company service are usually the only differences between Medigap policies with the same letter sold by different insurance companies. Fortunately, Medigap policies are guaranteed renewable even if you have health problems. The insurance company can't cancel your Medigap policy as long as you pay the premium.

Toby Anderson watches as his wife Amy divides his five prescription drugs into a weekly schedule. (Photo: Jeff Topping/Getty Images)
Toby Anderson watches as his wife Amy divides his five prescription drugs into a weekly schedule. (Photo: Jeff Topping/Getty Images)

When to buy

The best time to buy a Medigap policy is during your Medigap open enrollment period. This is a 6-month period that begins on the first day of the month in which you're both 65 or older and enrolled in Medicare Part B.

The advantage of buying during this period is that the insurance company is not permitted to use your health status to deny you a policy or to charge you more for a Medigap policy than they charge someone with no health problems.

If you apply for Medigap coverage after your open enrollment period, however, insurance companies are generally free to impose medical underwriting requirements to determine if they will issue the policy and at what price.

There is a chart available at www.medicare.gov that illustrates how the various plans compare. To understand it, however, there are some complicating issues you must be aware of:

  • In Massachusetts, Minnesota, and Wisconsin, Medigap policies are standardized in a different way from the other states.

  • Plans D and G effective on or after June 1, 2010 have different benefits than D or G plans bought before June 1, 2010.

  • Plans E, H, I, and J are no longer sold. (Those who already have one of these can keep it, however.)

  • Starting January 1, 2020, Medigap plans sold to new people with Medicare won't be allowed to cover the Medicare Part B deductible. Because of this, Plans C and F will no longer be available to people new to Medicare starting on January 1, 2020. If you already have either of these 2 plans (or the high deductible version of Plan F) or are covered by one of these plans before January 1, 2020, you'll be able to keep your plan.

In summary, all Medigap plans cover your Medicare Part A co-insurance and hospital costs up to an additional 365 days after original Medicare benefits are used up.

Most plans cover your Medicare Part B co-insurance or co-payment. Beyond those generalities, it is best to consult the chart to compare the features of the various policy types.

Long-term care insurance

Let's begin with a definition. Long-term care (LTC) is different from traditional medical care. LTC helps one maintain the comforts of his or her current lifestyle as much as possible.

It is largely personal, custodial care, not intended to treat a medical condition, but to maintain a dignified, independent lifestyle for as long as possible. For example, someone with a prolonged physical illness, a disability or a cognitive impairment (such as Alzheimer's disease) will often need LTC.

What does LTC include?

LTC includes help with the activities of daily living. This help can come in various forms and settings, including a nursing home, home health care, adult day care, or care in an assisted living facility.

LTC costs are high and getting higher, and they often continue for many years. According to the U.S. Department of Health and Human Services, the average cost of a private room in a nursing home was $7,698 per month in 2017.

Paying for long-term care

Many people mistakenly believe that their normal health insurance or Medicare will pay for LTC. This is not the case, however. Presently, there are only three ways to pay for LTC:

  • Out of pocket, for those who can afford it

  • Medicaid, which is a state welfare benefit available only to the most needy

  • LTC insurance

We will focus here on LTC insurance, but let's note at the outset that it does not make sense for everyone. It is unaffordable for many. Why? Simply because the cost of care is high AND so is the likelihood that the insurer will have to pay your claim. As a result, obtaining LTC insurance may be cost prohibitive for some.

Who will need long-term care?

LTC insurance can make sense for people over 40 years old with assets of $100,000 to several million dollars. These folks may wish to avoid the increasing uncertainty of Medicaid and maintain the financial freedom to make choices when they need care. For many of them, it is important to leave an inheritance rather than risk depleting their estates if they must pay long-term care expenses out of pocket.

Benefits under long-term care insurance

Insurance companies offer a wide range of daily benefits for a number of years that you choose (generally two to six years, with a lifetime coverage option as well). That results in a lifetime dollar maximum benefit.

Most policies reimburse you up to the daily benefit amount for nursing home or in-home long-term care services once your eligibility is established. A few policies simply pay the full daily amount directly to the policyholder to be applied toward the policyholder's nursing home bill, or any other expense he chooses.

Either way, the patient is responsible for any remaining actual charges, if higher.

When do benefits start?

Benefits can start as soon as the policyholder becomes eligible, or they can begin after a "waiting," "elimination," or "deductible" period — usually of 30, 60 or 90 days. Most policies have "level" premiums. The age of the insured when he/she applies for coverage determines the annual premium to be paid.

Why your health matters

Understandably, all LTC policies require a medical exam. If your health is such that a claim appears inevitable, insurance companies will deny coverage because their risk of loss is great.

This is a good reason for one to buy the policy at a relatively young age, before any disqualifying conditions arise. If the condition arises after you have the policy, you cannot be dropped.

Some companies offer "rated" policies, charging a higher premium if the insured poses a higher than normal, but still acceptable risk.

Most of today's policies use the following criteria, either of which is sufficient to trigger benefits:

  • Need for substantial assistance from another person in performing any two or more of the "activities of daily living" (ADLs)

  • Severe cognitive impairment.

Elderly women walk on a sidewalk in the Pius quarter in Ingolstadt, Germany, October 5, 2018. Picture taken October 5, 2018. REUTERS/Andreas Gebert
Elderly women walk on a sidewalk on October 5, 2018.(Photo: REUTERS/Andreas Gebert)

The "activities of daily living"

Note that the ADLs used as "benefit triggers" in LTC policies are carefully defined. Driving a car and balancing a checkbook are activities we all do on a regular basis, but they are not recognized as ADLs. The six standard ADLs are:

  • Eating

  • Dressing

  • Bathing

  • Maintaining continence — The ability to maintain control of bowel and bladder function, or when unable to maintain control of these functions, the ability to perform the necessary personal hygiene

  • Toileting — the ability to move to, from and within the bathroom, taking care of all personal needs and hygiene.

  • Transferring — the ability to change body position (e.g., from bed to standing).

For more information

LTC policies and options are complex, and the decision to purchase should be based on careful study. The federal government provides a very useful Website that explains LTC insurance issues and explains policies available to federal employees. A great deal of useful information can be found there, since the federal employee policies are similar to those offered to the general public: http://www.ltcfeds.com/

Be sure to check out The Shopper's Guide to Long-Term Care Insurance, which is widely available from the National Association of Insurance Commissioners, and can be found here.

What to consider when buying long-term care insurance

The insurance company

The financial strength of the insurance company is always an important factor. This is particularly so with long-term care insurance, because of the long time before coverage might be needed.

The cost

Cost: long-term care insurance is not cheap. Any ethical sales agent should help assess whether a client can afford it over the long haul. The key to an affordable rate is buying the insurance when you are in your 40s or 50s, or at least no older than 65, and when you are in good health.

The increase in premium as one moves from 45 to 55, and then to age 65 and beyond, is dramatic.

There are so many variables involved in the cost of a long-term care policy that it is difficult to generalize. Meanwhile, here are some typical situations, with strictly "ball park" estimates:

  • A 65-year-old can expect to pay around $1,500–$2,000 a year at most companies for two or three years of $100-per-day coverage, including both nursing home and home care, with inflation protection and a 90-day waiting period. A 75-year-old might pay over $3,000 for the same coverage. For top-notch, lifetime coverage, those premiums might double or triple. The 45-to-55-year-old purchaser, however, can probably buy the same policy for a fraction of the older buyer's price.

  • The six "activities of daily living" serve as benefit triggers. But they have no precise, universal definitions. The definitions given in individual policies vary and therefore should be examined closely. Likewise, look closely at the definition of "cognitive impairment," which is another benefit trigger. Therefore, the more broadly defined that condition is, the better.

  • Any policy you are considering should include an option to purchase an inflation protection rider that will increase your initial daily benefit to match inflation over the years, within certain limits. Because the cost of care is likely to become significantly higher in the years until you make a claim, most experts advise anyone under 75 to include inflation protection.

Summary of healthcare in retirement

We can all expect to be increasingly concerned about our health — and the cost of healthcare — in retirement.

The reality is that these costs are likely to increase as we age, and the insurance mechanisms that help us deal with them are complex. There's no way around it. This page is but a very brief introduction to just some of the issues we'll face in paying for healthcare in retirement.

The take-home message here is simply that retired folks, as well as those approaching retirement, must recognize the need to educate and insure themselves appropriately before the need for care arises.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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