Understanding Medicare, Part A and B

Most retirees assume that Medicare, the government healthcare program, will cover most of their healthcare costs. But if you don't pay close attention to their terms and coverage, your retirement dream could end up in a emergency room. If you're 65 or older and eligible for MEdicare, be prepared to bear potentially major health care costs. Some of the estimates suggest that a 65-year old couple will spend about $200,000 over next 20 years on their health care costs, even with Medicare coverage. Those estimates are shocking for most people but there are some good reasons why cost is so much higher. Let's start by looking at the premium that Medicare charges for the coverage.

As most people know, Medicare Part A covers hospitalization costs. your Medicare expense depends on the three-month periods or quarters, that you have had Medicare-covered employment. If you or your spouse has 40 quarters(10 years) of Medicare-covered employment, you pay no premium for Medicare Part A. However this premium jumps to $226 a month if you have 30 to 39 quarters of Medicare-covered employment. It is even higher(at $410/month) if you have fewer than 30 quarters. Social Security Administration(SSA) sends out an annual statement that can explains how many quarters of earned income you have. You can also call SSA to get this estimate if you don't have your annual statement.

Like most insurance plans, Part A charges deductibles: $992 for a hospital stay of 1 to 60 days, $248 a day for days 61 to 90, and $496 a day for day 91 through 150. A 150-day stay could cost as much as $38,192. And after 150 days, you pay all costs. Medicare Part A also has exclusions such a prescription drugs and they don't pay for any of your prescription drugs.

Medicare Part B covers doctors services and outpatient hospital services. Medicare Part B is optional and you have to sign up to get coverage. Also, it is not free even if you have 40 quarters of Medicare-covered employment. Currently(2007) the premium is $93.50 a month. Your deductible is $131 a year, but you pay 20% of Medicare-approved amount after you meet the deductible. Assuming you're perfectly healthy for the year, you'll spend $1,122 for Part B premiums only. If you have fewer than 30 quarters of Medicare-covered employment, you'll spend $6,042 a year in PART A and PART B premiums. Also, Part B doesn't cover routine and preventive care that you have to pay for from your pocket.

Prescription Drugs - Medicare Part A and Part B don't cover prescription drugs. You need to buy additional coverage for it that is known as Medicare Part D and it is one of the most complicated plan out there. Each state has many different plans and the cost of each plan depends in part on your deductible. Social Security can also provide some extra help with the costs.

Furthermore, Part D coverage has gap, called "doughnut hole." Medicare will pay for 75% of your drugs, minus the deductible, up to a total drug cost of $2,225. That figure also include your deductible, your co-pays and the amount Medicare pays. After your total drug costs reach $2,250, though, you're on the hook for 100% of your costs until you've spent $3,600 in out-of-pocket drug costs. That's the doughnut hole. After you hit $3,600, you pay about 5% of your drug costs. You can, however, buy "Medigap" plans which pays some of your out-of-pocket costs.

As you can see. Medicare coverage is complicated and you share substantial costs with government. If you're not prepared, this could quickly deplete your retirement savings.

Now, the obvious questions would be how do you prepared for healthcare costs in retirement?

There is no magic answer to this question but with recent changes in healthcare plans and laws, there is hope. First of all, you can buy a supplement insurance policy with your Medicare coverage. Remember, Medicare Part B doesn't cover routine exams and check ups. You need to have supplement insurance to pay for these or pay from your pocket. Supplement insurance will cost you extra every month in premiums so there is your additional cost.

One of the new options on the table is Health Saving Accounts(HSA). If you're already retired, HSA accounts do offer value but not as much as if you were still working. HSA accounts allow you to save money in a saving account that you can rollover from year to year until you retire. If you consistently stay with these plans and keep your regular health care cost to minimum, you can save substantial amount of cash in your HSA account that you can use in your retirement years. For more information on HSA plans please read HDHP plans with HSA.