Medicare isn’t free; monthly costs past age 65 might shock users
By Sally Pipes
About 10,000 Americans turn 65 each day. Many soon might leave the workforce and claim the Medicare benefits they think they’re entitled to after paying Medicare taxes for decades in the workforce.
But they might be in for a rude awakening. Medicare isn’t free. Those approaching retirement need to prepare for that reality. Even after paying tens or hundreds of thousands of dollars in Medicare taxes over their careers, beneficiaries spend thousands of dollars more each year for coverage during retirement.
Medicare will cover the first 60 days in a hospital, but then a patient would have to pay $389 daily until the 91st day, when the fee would rise to $778. Medicare won't cover extended stays in skilled nursing facilities or long-term care.
Medicare will cover the first 60 days in a hospital, but then a patient would have to pay $389 daily until the 91st day, when the fee would rise to $778. Medicare won’t cover extended stays in skilled nursing facilities or long-term care.
That coverage doesn’t always guarantee them timely access to the doctors or specialists they might like to see. It’s no wonder seniors are increasingly opting for privately administered Medicare Advantage plans, which often offer more value than the conventional government-administered Medicare program.
People start paying for Medicare long before they’re elderly. To fund certain parts of the program, the government levies a 2.9% payroll tax. Technically, workers pay half and employers pay half. But economically, it’s all compensation for the employee, so it all comes out of the employee’s paycheck. Those with high incomes pay an additional 0.9% Medicare surtax.
That money adds up. According to the Urban Institute, an individual now in his mid-20s earning less than $23,400 annually will pay $60,000 in Medicare taxes by the time he turns 65. If that same individual made $83,000 each year over his lifetime, he’d pay $220,000 in total Medicare taxes. A mid-20s couple pulling in $134,900 each year would pay $375,000.
Once Americans turn 65 and enroll in Medicare, they face premiums, deductibles, and co-pays that can run thousands of dollars a year.
In a new survey, nearly 60% of respondents reported not knowing that Medicare premiums vary by plan and income. Roughly the same share didn’t know there were different deductibles for the parts of Medicare that cover hospital care, outpatient care and prescription drugs.
The deductible for Part A, which covers hospital and inpatient services, is $1,556 this year. The deductible for Part B, which covers outpatient visits, is $233. And the maximum deductible for Part D, Medicare’s prescription drug benefit, is $480 this year.
That means seniors could pay more than $2,000 out of pocket, in addition to the thousands they may already be spending on premiums, depending on their income, before Medicare even begins paying for their care.
After they hit their deductible, patients must cover part of their treatment costs through co-pays and co-insurance. And since Parts A and B don’t have out-of-pocket maxima, there’s no limit to what seniors might face in cost-sharing, no matter how sick they get or how much care they require.
Altogether, the average couple with Medicare will need $300,000 to cover their health care costs after they retire, according to a report from Fidelity Investments. But that estimate accounts only for the out-of-pocket costs of Medicare Parts A, B and D, not the cost of other health-related services the government won’t cover.
Seniors who are in a hospital for an extended time could rack up additional bank-breaking bills. Medicare will cover the first 60 days of a hospital stay. But on day 61, a patient has to pay $389 daily until the 91st day, when the daily bill goes up to $778. If she has to stay in the hospital long enough or return to the hospital often, she could be on the hook for the full cost of additional days in the hospital.
Medicare won’t cover extended stays in skilled nursing facilities. And even though there’s a 70% chance that someone turning 65 today will need long-term care in the future, Medicare won’t cover that either.
To help seniors cover the out-of-pocket costs of those services and others Medicare doesn’t cover, such as for hearing, dental and vision, the government recommends purchasing a Medigap plan. But these supplemental insurance plans can cost an additional $300 each month.
Most seniors don’t have nearly enough savings to cover these expenses. The Fidelity report revealed that half of workers who have spent time thinking about retirement expenses think they’ll need $50,000 or less to pay for medical care. Not surprisingly, more than 1-in-10 Medicare beneficiaries have delayed care because they can’t afford it.
Sally C. Pipes is president, CEO and Thomas W. Smith fellow in health care policy at the Pacific Research Institute.