Health Care Costs in Retirement: Can You Separate Fact from Fiction?

As their 65th birthday looms, many people eagerly anticipate the affordable access to health care that Medicare will provide. After all, Medicare covers everything, right? Not exactly. Because of this common misconception, many people are caught off guard when they realize that each one of the dozens of Medicare options available to them comes with its own set of out-of-pocket cost implications. In fact, a survey of the newly retired found 43 percent are spending more on health care than they had planned.

The more you know about Medicare plans and costs, the better prepared you’ll be to avoid unpleasant surprises. Think you’re savvy enough to discern myth from fact when it comes to your health care costs in retirement? Read on to put your knowledge to the test.

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When comparing Medicare plans, it’s best to choose the lowest-premium option to help minimize your costs.

Fact: While premiums are an important factor when choosing a health care plan, they should not be the only factor – or necessarily the most important either. Sometimes a low monthly premium option comes with higher out-of-pocket costs or lacks benefits and services that are important to you.

It’s best to understand the total costs of a plan – including the deductibles, copays and coinsurance – as well as any benefit limitations that could increase your costs. For example, if the hospital you use isn’t in a plan’s network, you’ll likely incur higher costs if you choose to access care there. If you like to exercise and stay active, a plan that covers a fitness center membership could save you the expense of a monthly gym membership. Want to see a dentist or optometrist? Original Medicare likely won’t cover that care, meaning you’ll have to pay for it out-of-pocket, unless you choose a Medicare Advantage plan with dental and vision coverage.

Clearly there’s more to consider than just the monthly premium, so you’d be wise to spend some time digging into the details of a plan before enrolling.

Myth: If I am admitted to the hospital twice in one year, my costs for the second hospitalization will likely be far lower since I’ll probably have reached my deductible.

Fact: Medicare determines your charges for hospital care based on what’s called a benefit period, which starts on the first day you are admitted to a hospital or skilled nursing facility and ends after you’ve been out of the hospital or facility for 60 consecutive days. The Medicare Part A deductible is applied to each benefit period, meaning you will have to meet your deductible for each one – even if you have two in the same year.

Let’s say you are hospitalized in early January and discharged three days later. You would have to meet the 2018 Part A deductible of $1,340 before your Part A benefits would kick in and begin covering your care. If you are hospitalized again in June, you would once again have to meet the Part A deductible and pay another $1,340.

Keep in mind that many Medicare supplement and Medicare Advantage plans cover the Part A deductible. Medicare Advantage plans typically charge daily copays for hospital care instead.

Myth: If I enroll in a Medicare Advantage plan, I will pay only one premium. And if my plan has a $0 premium, I won’t have to pay any premium at all.

Fact: The simplicity of Medicare Advantage is one of the reasons enrollment in these plans has grown so dramatically. Many people appreciate the convenience of wrapping all of their Medicare coverage into one plan and having just one card in their wallet. That said, choosing Medicare Advantage doesn’t mean you’re totally off the hook in terms of paying monthly premiums. You are still responsible for paying your Part B premium. In 2018, the standard Part B premium is $134, but it may be higher or lower depending on your income.

Myth: There isn’t much you can do to contain or manage health care costs. It’s mostly up to chance or luck.

Fact: While no one can predict or completely control their future health care needs, you can take steps to protect yourself from high health care expenses. Choosing a Medicare plan that limits the amount you spend on health care costs during the year is one option to consider. Look for plans with an out-of-pocket maximum, which is the most you will pay for covered services in a year. Once you reach that amount, your plan will cover 100 percent of the cost of the Medicare-covered services you receive, and you’ll pay only your premiums. Medicare Advantage plans and two Medicare supplement plans include out-of-pocket maximums.

Medicare supplement plans can also offer some predictability in your health care costs by covering many of the costs Original Medicare doesn’t, such as coinsurance, copays and deductibles.

Regardless of the plan you choose, everyone can stand to benefit by being proactive about taking care of their health. Eating a nutritious diet, exercising regularly, seeing your primary care doctor annually, getting your recommended cancer screenings and taking your medications exactly as prescribed are all steps you can take to help protect your health – and possibly your wallet from the expense of managing major health issues later on.

Myth: If you fall into the donut hole, you’ll stay there until the next calendar year.

Fact: Falling into the donut hole sounds like something out of Alice in Wonderland, but nothing about it feels like a fairy tale for the small percentage of Medicare beneficiaries who find themselves in it each year.

The donut hole refers to the coverage gap in which people pay a large portion of their prescription drug expenses. Under Part D plans, you pay a copay or coinsurance for your prescriptions after meeting your deductible. For 2018, the donut hole comes into play when your total drug costs (the combined amount you and your plan pay for prescriptions) reaches $3,750.

Once in the donut hole, you’re responsible for paying 35 percent of the cost of brand-name drugs and 44 percent of the cost of generic drugs. But the donut hole doesn’t last indefinitely. When your total prescription drug costs reach $5,000, you’ll enter the catastrophic phase of coverage. While it may sound intimidating, this phase will actually bring some relief from your drug costs. Your out-of-pocket costs for your drugs will come down substantially in this phase: $3.35 for generic drugs and $8.35 for brand-name drugs, or 5 percent of the cost of the drug, whichever is greater.

While not exactly a storybook ending, there is some good news when it comes to the donut hole: It’s getting smaller each year, meaning Medicare enrollees are gradually paying lower and lower coinsurance amounts. Starting next year, people will pay just 25 percent of their brand-name drug costs and 37 percent of their generic drug costs in the donut hole.

So how did you do? Regardless of whether you aced this test or were totally stumped, there’s much more to learn when it comes to a topic this complex. The following resources can help you better understand health care costs during retirement and how to manage and plan for them.

  • This calculator from AARP allows you to estimate what your health care costs throughout retirement could be, based on your age, lifestyle and other factors.
  • Curious if you qualify for financial help with Medicare? Visit Medicare Made Clear to learn about financial assistance programs that may be available to you.
  • Medicare Made Clear also offers further explanation of the donut hole.
  • This America’s Health Rankings report provides a broader look at the topic of older adults’ readiness for health care costs in retirement.

Plans are insured through UnitedHealthcare Insurance Company or one of its affiliated companies. For Medicare Advantage and Prescription Drug Plans: A Medicare Advantage organization with a Medicare contract and a Medicare-approved Part D sponsor. Enrollment in these plans depends on the plan’s contract renewal with Medicare.