5 ways to cut health care costs in retirement
Published 7:00 a.m. UTC Nov. 1, 2014
One of the biggest costs people face during retirement is on health care. Some believe Medicare will cover most or all of their medical costs, but this is not the case for many Americans. In fact, Fidelity estimates that a couple who retired in 2013 will need more than $220,000 to cover out-of-pocket medical expenses during retirement—and this number doesn’t take into consideration the costs of any nursing home care.
Being educated about how you can manage health care costs is a valuable way to ensure that your wealth endures through retirement while leaving a legacy for your heirs.
Here are five practical ways to save money on health expenses in retirement.
1. Get a Medicare supplemental plan
One way to protect against out-of-pocket health expenses and make health costs more predictable in retirement is to enroll in a fee-for-service Medicare supplement insurance plan. Also known as Medigap, this coverage plan can help pay for any co-payments, coinsurance and deductibles that Medicare doesn’t cover.
Medicare can come with some very high deductibles and co-pays. For example, Medicare Part A, which covers hospital service, carries a deductible of $1,216 for each benefit period in 2014. With Medicare Part B, which covers physician and outpatient care expenses, most people pay a premium of $104.90 each month and a deductible of $147 per year, plus 20% in coinsurance for most medical services.
Medigap can save retirees a lot of money on these costs. In addition, some Medigap policies will pay for medical care when traveling outside of the U.S. — something that Medicare likely won’t cover.
There are a few important things to know about Medigap. First, in order to get a Medigap policy, you must already have Medicare Part A and Part B. Also, there’s a monthly premium for Medigap, and that amount will vary by insurance company, the plan and where you live. Finally, a Medigap policy covers only one person, so if you want coverage for yourself and your spouse, she’ll have to buy a separate Medigap policy.
While Medigap can help pay for out-of-pocket expenses, it’s important to understand that it won’t cover everything. For example, Medigap policies generally will not cover vision or dental care, eyeglasses, hearing aids or long-term care. In addition, Medigap plans sold after Jan. 1, 2006, do not include prescription drug coverage.
Buying Medigap coverage can be a smart way to save on Medicare costs — but retirees should carefully compare the cost of each plan and its features.
2. Enroll in Medicare Part D
As mentioned, Medigap does not cover prescription drugs. To get coverage that helps cover drug costs, retirees can join a Medicare prescription drug plan, better known as Medicare Part D. Most Part D plans will charge a monthly fee in addition to a monthly premium, which varies by plan. Medicare drug plans also have a yearly deductible, which is the amount you must pay each year before the drug plan begins to pay. Deductibles will vary between plans, but no drug plan can have a deductible of more than $310 in 2014.
Given the variety of insurance carriers and benefit structures, during the annual open enrollment period it’s important to choose a plan based on your prescription history. Medicare provides a free online Plan Finder Tool that can assist beneficiaries with this comparison. And there are professional patient advocates who can help by estimating your anticipated medical costs. These professionals also help patients interpret their medical bills, identify inappropriate claims denials and negotiate on their behalf with hospitals, physicians or insurance carriers for reduced payment. Anyone can access patient advocates on NerdWallet’s Ask an Advisor platform, under the Healthcare focus area.
Most Part D plans will also have a coverage gap, also known as the “donut hole,” which is a coverage limit beginning after you’ve spent a certain amount on covered drugs. However, savings are available. Companies that make brand-name prescription drugs are required to participate in the Medicare’s Coverage Gap Discount Program, which offers discounts on brand-name drugs specifically for people who are in the coverage gap.
For 2014, the coverage gap begins after you spend a total of $2,850 on covered drugs, which includes the deductible. Once you reach the coverage gap in 2014, you’ll end up paying 47.5% of the plan’s cost for covered brand-name prescription drugs.
The entire cost of the drug, including the discount the drug company pays, is counted toward the amount needed to get out of the coverage gap. Catastrophic coverage kicks in when you reach the out-of-pocket threshold (which, for 2014, is $4,550). At this point, you’d have to pay only a small coinsurance payment or copay for the rest of the year.
The donut hole will shrink substantially over the next several years. By 2020, you’ll only have to pay 25% for brand-name and generic drugs during the coverage gap period.
3. Save big money on prescriptions
It always pays to shop around and research the best deals. When it comes to prescription drugs, retirees may want to consider switching from brand-name drugs to generics, which can work just as well and may result in big savings. Ask your doctor whether there are any generic drugs available for your condition.
Another way to save on prescriptions is by ordering in bulk. For example, a drug may be available in a 90-day supply, as opposed to a monthly supply. Ask your pharmacy if they offer a discount on bulk orders of your articular drug.
Choosing the right pharmacy to fill your prescriptions also matters. According to a 2013 study by Consumer Reports, Costco’s pharmacy had the lowest retail prices overall for drugs, while CVS had the highest. And the five most widely prescribed generic drugs at CVS cost $916, while the same drugs cost just $167 at Costco.
4. Live an active, healthy lifestyle
Poor health and chronic illnesses can be the result of a lack of physical activity, poor diet or bad habits. By staying active and increasing physical activity, retirees can increase their energy, require fewer visits to the doctor, improve heart health and potentially live longer.
Exercising and staying active also gives your wallet a boost: According to the American Heart Association, physically active people save $500 a year in health care costs, primarily in the form of reduced insurance premiums and out-of-pocket costs. With fewer visits to the doctor and limited medical bills, overall health expenses should decrease.
How can retirees increase their physical activity? It’s not so difficult. Simply talking a 30-minute walk each day can increase heart health. This can be done in several short walks or one long walk. The next step is improve your diet and eating habits, which can also help to prevent diabetes.
Smokers should know that quitting is great not just for their well-being but also their wallet. A pack a day at $10 per pack costs $3,650 per year. Over 10 years, that’s $36,500, before accounting for inflation. You can imagine the significant financial benefit if those funds were instead saved and invested in a diversified portfolio.
5. Plan early for end-of-life care
Medical expenditures during the last years of life will likely be far greater than in earlier years. In fact, average out-of-pocket expenditures in the five years prior to a person’s death are $38,688, according to a recent study by researchers at the Mount Sinai School of Medicine.
The first thing retirees can do to plan for end-of-life care is to create an advanced directive, also known as a living will. This legal document gives a set of written instructions that specify the actions to take if you are no longer able to make decisions due to illness or incapacity. An advanced directive can help the retiree and her family avoid unnecessary headaches and confusion during an already difficult time.
Next, they should consider buying long-term care insurance, which usually covers home care, assisted living, hospice care, nursing homes and more. This insurance can be a good investment as it helps cover out-of-pocket expenses, which can drain savings and retirement funds.
There is also a tax benefit to long-term care insurance, with premiums considered a medical expense by the IRS. Retirees should carefully shop and compare several policies before choosing a plan. For questions on tax treatment of medical expenses, connect with Enrolled Agents or CPAs on NerdWallet’s Ask an Advisor platform.
NerdWalletis a USA TODAYcontent partner providing general news, commentary and coverage from around the Web. Its content is produced independently of USA TODAY.
MORE: Is early retirement in your future because of Obamacare?