Everyone needs to plan ahead for Medicare

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Having a thorough understanding of how Medicare works and the choices you need to make about its coverage is an essential part of retirement income planning. For most retirees age 65 and above, Medicare is the primary source of health coverage. But Medicare does have limits, paying for only about half the average retiree's healthcare expenses, according to the AARP Public Policy Institute. You need to know these limits and incorporate them into your planning.

There are a few key points you need to know up front. We’ll explain all of them in more detail later in this article.

First, whether you are working or not, you should enroll for Medicare within six months of turning 65. Medicare coverage can differ depending on whether or not you’re employed, but there are good reasons that everyone approaching age 65 should enroll. Generally, to get Medicare, you need to sign up during a seven-month initial enrollment period that occurs close to your 65th birthday. If you don't sign up during that initial enrollment period, you'll have more opportunities to enroll, but you might end up paying more for coverage.

Also, it pays to explore how Medigap plans, sold by private companies, help fill some of the gaps left by Medicare. You must be enrolled in the original Medicare plan (which is different from Medicare Advantage) in order to enroll in a Medigap plan.

Let's dig deeper into Medicare, keeping in mind that more comprehensive information about eligibility, enrollment and coverage can be found at medicare.gov or by calling 1-800-MEDICARE (1-800-633-4227).


Medicare is a national health insurance program for individuals age 65 and older and people under 65 who are receiving a Social Security disability benefit. Generally, you need to sign up for Medicare in order to be covered (as explained below under "Signing Up for Medicare"). If you're not properly enrolled in Medicare, any claims you submit to the program will be subject to denial.

Even if you are eligible for Medicare, there may be some situations—such as when contributing to a Health Savings Account (HSA)—where you might choose to defer enrollment because it makes better economic sense. We discuss this below under “Explore Further.” It’s a good idea to seek additional expert guidance before making such decisions.

What Medicare covers

Medicare originally consisted only of Part A (hospital insurance) and Part B (medical insurance). Today, there's also Part C, also known as Medicare Advantage, which is offered by private companies approved by Medicare. Part D is prescription drug coverage.

Part A (hospital insurance)
Once you become eligible for Medicare, as long as you or your spouse paid Medicare payroll taxes for at least 10 working years or 40 quarters, you can get Part A coverage without paying any premiums. After you've met an annual deductible, Medicare Part A helps pay for inpatient hospital care, inpatient care in a skilled nursing facility (but not custodial or long-term care), home healthcare and hospice care. The annual deductible is $1,156 in 2012 and is subject to an annual adjustment.

If you haven’t paid the payroll taxes long enough and therefore don't qualify for free Part A coverage, you can purchase this coverage.

Two main options for getting Medicare coverage

Original Medicare
Part A hospital insurance (covers part of the cost of hospitalizations)
Part B medical insurance (covers a portion of the cost of doctors visits and other health care services)
Optional add-ons
Part D prescription drug coverage
Medicare supplemental insurance (Medigap)
Medicare Advantage

Part C includes the same Part A and Part B coverage as original Medicare and may have additional benefits such as prescription drug coverage

Optional add-on
Part D prescription drug coverage (if not included in the Medicare Advantage plan you've chosen)

Part B (medical insurance)
After you've met an annual deductible (separate from the Part A deductible), Part B helps pay for doctors' services and many other medical services and supplies not covered by Part A. These services and supplies are covered no matter where you receive them – in a hospital or clinic or in your home. The annual deductible is $140 in 2012 and is subject to an annual adjustment.

Part B requires you to pay a premium. In 2012, the premium is $99.90 a month, with higher premiums required from individuals with annual income over $85,000 and married couples with annual income above $170,000. Premium levels and income thresholds at which higher premiums apply are subject to annual adjustments.

Part C (Medicare Advantage)
Depending on where you live, you may have access to one or more Part C plans, also known as Medicare Advantage plans. If you join a Medicare Advantage plan, you get the same Part A and Part B benefits available through original Medicare, but your coverage comes from a federally approved, private company instead of directly through the Medicare program itself. Medicare Advantage plans are typically based on the "managed care" approach of a health maintenance organization (HMO) or preferred provider organization (PPO). Depending on the specific plan you choose, you will have either low deductibles or none at all. You may be responsible for copayments for doctor's office visits and other services.

A Medicare Advantage plan may provide extra coverage compared to what you'd get under original Parts A and B. For example, Medicare Advantage may offer prescription drug, vision, hearing or dental coverage, disease management programs, and/or health and wellness programs. Your monthly premium for Medicare Advantage will depend on the specific plan you choose.

Part D (prescription drug coverage)
Everyone enrolled in Medicare is eligible for Medicare Part D prescription drug coverage, which is offered by federally approved, private companies. There are many Part D plans to choose from. While all Prescription Drug Plans (PDPs) must offer a basic level of coverage enforced by the federal government, plans often provide enhanced benefits and options in addition to basic benefits. Monthly premiums, annual deductibles and copayments vary widely among plans.

Medicare coverage has limits

Under Medicare, you are personally responsible for deductibles, copayments and charges exceeding an approved amount. Also, certain services and supplies are excluded from Parts A and B, including dental care, vision care and hearing aids.

Long-term care is generally excluded from original Medicare and Medicare Advantage as well as employee and retiree health plans. Long-term care includes services to help a person carry out essential daily activities like eating, bathing and dressing. Medicaid does cover long-term care, but only after most other resources you have are exhausted.

Your basic options under Medicare

You have a choice of two main ways to get your Medicare coverage: either through original Medicare (Part A alone or Parts A and B) or Medicare Advantage (Part C).

If you choose original Medicare, you can add one or both of the following options: Part D prescription drug coverage and Medicare supplemental insurance, also known as Medigap coverage.

Medigap plans, sold by federally approved, private companies, help pay some of the healthcare costs that Parts A and B don't pay for, like your deductibles, copayments and coinsurance, and certain supplies and services excluded by Medicare. Newly sold Medigap plans do not include prescription drug coverage.

In most states, insurers can offer only standardized Medigap policies labeled A through N. All policies identified by a particular letter must offer the same benefits regardless of which insurer offers them. Cost is usually the only difference between different insurers' Medigap policies with the same letter.

If you choose Medicare Advantage, you have the option of adding Part D prescription drug coverage, but only if the Medicare Advantage plan you've chosen does not already offer prescription drug coverage. If you join a Medicare Advantage plan, you don’t need — and can’t be sold — a Medigap policy.

Signing Up for Medicare

If you're already getting a Social Security benefit, typically, you will get original Medicare Parts A and B automatically starting the first of the month you turn 65. If your birthday is on the first of the month, the date your coverage starts automatically will be the first of the month immediately preceding your 65th birthday. A Medicare card will be mailed to you by the Social Security Administration. If you don't want Part B or wish to enroll in Medicare Advantage as an alternative to original Medicare, follow the instructions that come with the card.

What does Medicare's future look like?

While some choose to ignore it, the future of Medicare has serious implications for healthcare costs. According to the government’s own figures, the trust fund supporting Medicare Part A, which covers hospital benefits, will be exhausted by 2022.1 There's no way to guess exactly how Medicare benefits will change given an impending insolvency, but it's safe to assume that there will be either cuts in benefits or increases in premiums and taxes to cover shortfalls in the system’s funding, all of which would result in increased costs to the beneficiary.

If you're close to 65 and not getting a Social Security benefit, you must sign up in order to receive either original Medicare or Medicare Advantage. Your “initial enrollment period” begins three months before your 65th birthday and lasts seven months. If you don't apply during your initial enrollment period, you will generally have to wait until the next “general enrollment period” to apply, and you might have to pay more for coverage. General enrollment periods are January 1 to March 31 of each year. If you sign up during your initial enrollment period or a general enrollment period, you cannot be denied coverage if you're otherwise eligible for Medicare. To enroll in original Medicare, contact your local Social Security office or go to medicare.gov . To enroll in a Medicare Advantage plan, contact the company offering the specific plan of your choice.

Make sure you fully understand how and when to enroll for Medicare, since missing a key date can affect your ability to receive coverage or result in penalties. Visit medicare.gov , call the Medicare help line at 1-800-MEDICARE, or seek expert advice if needed.

Even if you continue to work and are covered by an employee health plan, you should sign up for at least Part A during your initial enrollment period. Your workplace plan will provide your primary coverage, but Part A might pick up some of the costs not covered by the workplace plan, and, typically, you won't have to pay any premiums for Part A anyway. In this situation, Part B may not be worth the premiums in light of the coverage you have from your workplace plan. Again, information available at medicare.gov or 1-800-MEDICARE can help you make this decision.

It’s important to note that non-traditional spousal relationships or partnerships require additional planning to ensure key enrollment dates are identified and to avoid penalties for failure to enroll in a timely manner.

If you retire with retiree health coverage from your employer, once you become Medicare-eligible, Medicare will be your primary plan and the plan from your former employer may fill in some remaining gaps in coverage. Before signing up for Part B or Medicare Advantage, figure out if it will be worth the premiums in light of the coverage from your former employer. You will not be able to buy an additional Medicare Part D plan if you have “creditable coverage” from your employer. “Creditable coverage” is Medicare coverage that is at least as good as the minimum coverage from Medicare. If the Medicare coverage from your employer does not meet the minimum Medicare standards, then you may buy additional coverage. Your employer will send you a notification letter letting you know what type of coverage they provide.

Explore further

With healthcare costs continuing to outpace the general inflation rate, it's critical that you go beyond this general overview and learn more about how Medicare works. Primarily, you will need to do the following:

  • Keep an eye on the calendar. Be aware of your key dates for signing up for Medicare. Remember, if you sign up during your initial enrollment period or a general enrollment period, you cannot be denied coverage if you're otherwise eligible for Medicare.
  • Become more familiar with the original Medicare plan. Think about whether you'd like to enroll in Part B. Also, explore Part D and Medigap supplemental insurance plans and providers serving the area where you live.
  • Get to know Medicare Advantage as an alternative to the original Medicare plan. Compare the various Medicare Advantage plans available in the area where you live and the benefits and costs of each plan. Also, learn about the providers serving your area.
  • Plan around any health savings account (HSA) you may be contributing to. Once you enroll in Medicare at age 65, you can no longer contribute to a health savings account. You will, however, still be able to use money already in the account to reimburse yourself for uninsured medical expenses. If your employer plan covers more than 20 employees, you may choose to defer enrollment in Medicare and continue contributing to your HSA account. Companies with fewer than 20 employees can require you to enroll in Medicare when you turn 65, so your contributions to an HSA must stop. Making decisions about your HSA and Medicare can be complicated and may require a careful cost-benefit analysis to determine which of several options will pay off best for you. Ask your employer’s benefits office or your insurance company, or contact medicare.gov or 1-800-MEDICARE for additional guidance.
  • Understand the bigger picture of your retiree healthcare costs. Make sure you have a plan to address gaps in your medical coverage, including the exclusion of most long-term care services under Medicare and retiree health plans. A good portion of your retiree healthcare costs will probably have to be paid out of your income and savings, and you need to factor these out-of-pocket costs into your overall planning for retirement. For further discussion, see our article, No place to hide: The rising cost of healthcare in retirement.

You need to consider many factors, including your current health and family health history, as you plan for Medicare, long-term care and your healthcare during retirement in general. Be sure to speak with your TIAA-CREF advisor, who can help you fully understand your options.