Understand Medicare Parts A-D
It is important to have a thorough understanding of Medicare when approaching retirement. Medicare is not an income generating piece of your retirement plan, so unfortunately it gets overlooked by most financial advisors. Understanding expenses is a vital step in retirement planning. Since healthcare is a substantial piece of most expenses in retirement, it is important to have a thorough understanding of this subject.
Medicare is a federal insurance program for senior citizens. All our adult working lives we have been paying into the Medicare system via the FICA tax. The FICA tax is broken into two parts. The first part is known as OASDI (Old age survivor, disability, and insurance). OASDI is often referred to as social security. The social security portion of the FICA tax represents about 80% of the total FICA tax. The Hospital insurance (HI) is the remaining 20%. The HI portion is also referred to as Medicare part A.
There are four parts of Medicare everyone needs to be knowledgeable about. Parts A, B, C, and D. Each part is incredibly important and needs to be addressed in your health insurance strategy.
PART A: Also known as Hospital Insurance or HI. This portion simply gets someone in the building. This does not pay for the physician treating you. This portion of Medicare is paid for via the FICA tax. Generally, everyone qualifies for Medicare at age 65 and above. At the very minimum you must sign up for Medicare part A. Everyone has been paying into this their entire adult lives and its time to reap some benefit.
PART B: This portion pays for the physician service. Things like blood tests, equipment costs, home health care, and outpatient care are just some of the services Part B covers. The appropriate way to look at it is, Part A gets you in the door, and Part B pays for the services once inside the building. Part B is not paid for by FICA. Part B on average costs $135 per month. Part B does become more expensive when certain income thresholds are met. For instance, a married couple generating more then $170,000/year will have a higher Part B expense. In my opinion part B is just as important as part A.
Medicare parts A&B are also known as "original Medicare". Parts A&B consist of 80% of your Medicare equation. Parts C and D make up the other 20%.
PART C: Also known as Medicare supplement. This portion allows you to visit doctors/specialists for non-emergency care. There are two options for Part C. Medigap and Medicare advantage.
MEDIGAP: Medigap costs between $100-200 per month. Any doctor that accepts part A/B also accepts Medigap. It is important to know that a person will always be accepted for Medigap coverage when enrolling simultaneously for parts A and B. In layman’s terms, everyone qualifies for Medigap if they sign up at the same time for all pieces of Medicare at the same time. However, if you decline Medigap and elect for Medicare Advantage, we’ll talk more about Medicare Advantage in a moment, than you will have to be underwritten for Medigap in the future. Please know that Medigap will be sold through insurance companies. The plans are listed as such: Plan N, Plan F, etc. No matter the insurance company, each “plan N” will be identical in coverage to another insurance companies “Plan N”. Therefor if one insurance company is charging more for their “Plan N” then always choose the least expensive option. They are identical Medigap plans.
MEDICARE ADVANTAGE: Medicare advantage is also operated through insurance companies. However, it is operated similarly to the private health care system we have today. Medicare Advantage is operated on a network base. If the network is strong in your geographical area. Then Medicare Advantage is a potentially good option. The reason is that Medicare advantage is typically less expensive then Medigap. Understanding the network base coverage becomes important when travelling. For instance, there is no Medicare Advantage network available in Alaska, therefor Medicare advantage patients cannot use their Medicare Advantage coverage there.
Another problem with Medicare Advantage there are a lot of changes year to year with your plan. These can be difficult to keep up with for senior citizens. Medigap is a much more stable network with less changes than Medicare Advantage.
PART D: This part covers prescription drugs. Some Medicare advantage policies will include part D. Medigap does not have part D. Part D on average can cost $35/month. If you are going the Medicare advantage route you need to go through a broker and not a captive agent. It's impossible to keep up with the changes and maintain an enjoyable lifestyle. Do not try to do this on your own. Health care brokers won't even charge you a dime. The health care brokers are the exact same as home/auto insurance brokers. The healthcare brokers will shop for you through a wide range of companies looking for the best deal. Captive agents can only sell you the company they work for. Obviously, you want to be sold the policy that benefits you the most- not the insurance company.
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