Let’s get serious about health care costs in retirement

If your retirement income does not exceed $88,000 or $176,000 if married, you pay the standard Medicare Parts B and D premium. That includes the great majority of all retirees.

Your standard Medicare premium in 2021 is $148.50. The average Part D premium is $38.00. To protect from Medicare out-of-pocket costs, most people take a supplemental plan, most often Medigap Plan G which covers all Medicare out-of-pocket costs except the Part B deductible; currently $203.00. And, you can use any doctor or facility that takes Medicare which is nearly all.

Medigap Plan G will cost $200 to $240 more or less.

Thus the typical retiree should plan for at least $416.00 in monthly premiums, but little out-of-pocket costs for medical care.

Your potential out-of-pocket prescription costs under Part D of Medicare vary based on the plan you select and the type of drugs you take. Generics save money and may not be subject to a deductible or co-pay. Some retirees find using something like GoodRx is less expensive than using their prescription plan.

Once you and your Part D plan spend $4,130 combined on drugs (including deductible), you’ll pay no more than 25% of the cost for prescription drugs until your out-of-pocket spending is $6,550, under the standard drug benefit. Remember, that is not spending from your pocket alone, the $6,550 includes your co-pay, and the required discount provided by the manufacturer.

Here is an example from Medicare.gov

“Mrs. Anderson reaches the coverage gap in her Medicare drug plan. She goes to her pharmacy to fill a prescription for a covered brand-name drug. The price for the drug is $60, and there’s a $2 dispensing fee that gets added to the cost, making the total price $62. Mrs. Anderson pays 25% of the total cost ($62 x .25 = $15.50).

The amount Mrs. Anderson pays ($15.50) plus the manufacturer discount payment of $42 ($60 x .70 = $42) count as out-of-pocket spending. So, $57.50 counts as out-of-pocket spending and helps Mrs. Anderson get out of the coverage gap. The remaining $4.50, which is 5% of the drug cost ($3) and 75% of the dispensing fee ($1.50) paid by the drug plan, doesn’t count toward Mrs. Anderson’s out-of-pocket spending.”

Catastrophic coverage refers to the point when your total prescription drug costs for a calendar year have reached a set maximum level ($6,550 in 2021, up from $6,350 in 2020). At this point, you are out of the prescription drug “donut hole” and your prescription drug coverage begins paying for most of your drug expenses.

Once you’ve reached the catastrophic coverage threshold in 2021, you’ll pay $3.70 for generic drugs and $9.20 for brand-name drugs, or 5 percent of the total drug cost, whichever is higher (the dollar amounts are adjusted for inflation each year).

Long-term care is not covered by Medicare and for which insurance is expensive and becoming less available.

LTC is custodial or maintenance care for those who are unable to perform the basic functions of daily living for themselves. LTC in a nursing home can easily cost $100,000 a year or more. However, the majority of LTC is provided outside of a facility, mostly at home, (mostly by unpaid caregivers). Only 4.5 percent (about 1.5 million) of older adults live in nursing homes and 2 percent (1 million) in assisted living facilities.

Your medical and family history are factors in determining your risk. Your total financial planning should consider this risk.

7 comments

  1. Long term care insurance was a fairly new insurance product when I initially applied for it in 2001. It seems that the insurance companies didn’t factor in expenses and utilization properly and over time have had to raise their premiums dramatically. Between 2001 and 2019 my premiums have gone up 250% and I don’t know how long they will stay at the current level. When they raise the rates they offer to keep the current rate by diminishing coverage. Before considering buying into LTC insurance you need to evaluate the reasons for buying it in the first place. Mine was to protect assets. After you have been paying premiums for many years and having the rates increase so much, you are faced with the sunk cost problem. If you cancel the policy, all the prior premiums are lost with no corresponding benefit.

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    1. Very true, we are in the same boat. Not sure what we will do when we get the next increase in the Fall which we have already been told will be 27% on top of the 45% this year. Big problem is assessing the risk. I am toying with the idea of investing the total premiums for my wife and I and hoping for the best, but at ages 78 and 82, who knows?

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  2. Since I am still 6 years away from Medicare, I just want to understand the worst case here for planning purposes and that I followed the numbers correctly above.
    Annual (2021) Medicare Parts B,D, & G equals about $4992.
    Annual out of pocket limit (2021) is $6550
    Once we reach the Catastrophic limit of out of pocket ($6550) I will start paying an additional 5% for my drugs.

    So in a very bad year or more likely closer to end of my life, I could expect up to pay $11,542 plus 5% for drugs over the out of pocket limit per year. Of course this number will be adjusted up for the year when it happens.

    My current resources and financial plan can cover this and these are the most realistic numbers I have seen for planning purposes. Thank you.

    LTC is a whole other story for me and I think for most people.

    Question. Are these limits by family or individual? Does the husband and wife have to have the same drug plans? Currently, I have chosen my healthcare plan based mostly on one drug that they cover and others do not. My wife just started taking an expensive drug which is also currently covered. But what if they both are not covered by the same plan?

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    1. Medicare is individual insurance, so a couple is times 2. Husband & wife do not have to get the same Medigap or drug plans, nor do the plans need to be from the same insurance company.

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      1. Thanks. That was an important to note. I have to plan on up to $23K per year plus 5%. I don’t think I am quite there.

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    2. There is no out of pocket limit for Medicare. However, Medigap plans will cover all or most deductibles and coinsurance. The $6550 relates to Rx Part D and is not just your OOP but includes to 70% discount from the retail price required by the manufacturer.

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