3 Medicare Decisions That Can Cost You Thousands

Transcript

Happy St. Patrick's Day. I've got my green vest on, and it's about 20 degrees here in Ohio with snow on the ground. Mind you, it was just 70 degrees back-to-back days a couple days ago in the middle of March. March is always a roller coaster, but we won't get into that.

Let's talk about Medicare. Exciting topic, I know you're dying to learn about Medicare. Medicare can be one of those topics you don't really care about until you're about to enroll or use it. And if you're approaching retirement, there's a good chance Medicare is somewhere on your radar. When people start looking into it, they usually have the same reaction: wait, I thought Medicare was free. Maybe not. Some people think Medicare is free, and it can get confused quickly with Medicaid, which is something completely different. But today we're talking about Medicare.

If you've ever looked into it, you might have seen there's a Part A, a Part B, a Part C, a Part D, Medicare Advantage, Medigap, premiums, penalties, you name it. It can get overwhelming pretty quick. I want to slow this down and talk through these Medicare decisions, because sometimes they can cost people thousands of dollars if they're not careful. But before we get into the top three things to be aware of, it helps to understand what Medicare actually is and how it was built. I'm a big believer that if you understand the foundation first, the rest of the system becomes much easier to understand.

So what is Medicare? Medicare became law in 1965 under the leadership of Lyndon B. Johnson. It was created because many older Americans had a very hard time getting health insurance once they stopped working. Before later insurance reforms like the Affordable Care Act, which now guarantees approval, insurers could literally deny coverage or charge much higher prices based on age or health status. So once people retired and lost their employer coverage, many simply couldn't get affordable health coverage anymore. The government created Medicare as a federal health insurance program primarily for people aged 65 and older, along with some younger people with certain disabilities or conditions. Today it covers more than 65 million people. And similar to Social Security, it's funded primarily through payroll tax during your working years. On most paychecks you'll see something called FICA tax. So Medicare doesn't just appear at age 65. Many people have been paying into the system their entire working life.

It can get confusing, because if someone says, all right, I'm going to go on Medicare, it sounds like one simple plan. But of course it's never one simple plan. Medicare is made up of several parts. There are technically four parts, but the easiest way to understand the system is to start with the foundation, and really the first two parts, Part A and Part B. Together, those two pieces are what people usually mean when they say original Medicare. Everything else builds on top of that. Maybe this isn't the best example, but I think it works. Think of Part A and Part B like the bun and the patty of a burger, and the rest are condiments. And trust me, condiments matter. Choosing the right ones matters just as much, and people have their preferences.

First up, Part A, hospital coverage. Part A is primarily hospital insurance. It helps cover things like hospital stays, skilled nursing care, home health care, and hospice care. Most people don't pay a monthly premium for Part A, because they paid Medicare taxes while working. An easy way to remember it: admitted to a hospital or a facility. If someone has a fall, breaks their hip, and is admitted to the hospital for surgery and recovery, that situation mostly falls into the Part A bucket.

Now, Part B, medical coverage. You can see how this is confusing already, hospital coverage and medical coverage. Part B covers doctor and outpatient medical care: doctor visits, specialists, lab work, X-rays and MRIs, preventive screenings, physical therapy. If Part A is the hospital side, Part B is the doctor and outpatient side, and Part B does have a monthly premium.

Let's skip ahead to Part D, prescription drug coverage. This part was added later, in 2003, because prescription medications had become a much larger part of health care spending. Medications for things like blood pressure, cholesterol, and diabetes are typically covered through Part D plans. In our burger analogy, this is like cheese on the burger, a pretty important topping. Someone might ask, why wouldn't everyone just add Part D? Some retirees have creditable drug coverage through a retiree health plan, VA coverage, TRICARE, or certain employer plans, and in those cases you may not need a separate Part D plan. But it's important to note that if someone doesn't have other qualifying drug coverage and delays enrolling in Part D, then years later says, oh wait, I want to enroll now, Medicare can apply a late enrollment penalty. The reason is simple: Medicare doesn't want people skipping drug coverage for years and then only joining once they suddenly need expensive medications. So delaying Part D without other coverage can make the plan permanently more expensive later. It's one of those decisions worth thinking through carefully.

So we've covered Part A, Part B, and Part D: hospital coverage, medical coverage, prescription drug coverage. Part C is coming, I promise. But first I want to talk about something called Medigap. Original Medicare, Part A and Part B, doesn't cover everything. There are still deductibles and coinsurance. If you want, you can add Medigap. Medigap policies are private insurance plans that help cover some of those remaining costs, like deductibles and coinsurance. They sit on top of original Medicare, so this could be onion, lettuce, or tomato, take your pick. It helps fill in some of the gaps, which is where the name comes from. Some retirees like Medigap because it creates more predictable medical costs. But Medigap is more like an onion, definitely a preference call, and not on every burger. It's important to understand that Medigap is totally optional.

Now back to the one we skipped, Part C, also known as Medicare Advantage. We have all these different condiments and toppings, and Medicare also created an option where you can order the whole burger already assembled. Instead of using Part A, Part B, and then adding Medigap or Part D, some people choose a private insurance plan that administers their Medicare benefits. These plans often bundle coverage together and frequently include prescription coverage as well. Many Medicare Advantage plans advertise lower monthly premiums and extra benefits like dental or vision, all in one bundled plan. Whether it's a burger or a combo meal, take your pick. But they may also involve provider networks, prior authorizations, and different out-of-pocket structures. Today, more than half of Medicare beneficiaries are enrolled in Medicare Advantage plans. That doesn't automatically make it the best choice for everyone. It just shows that people like the bundled structure. There's a reason we order combos and not everything separately.

To recap, the bun and patty are Part A, hospital coverage, that inpatient stay, and Part B, medical coverage, the basic doctor visits, X-rays, and lab work. Those are required. That's the foundation of Medicare. Everything else is optional toppings. I will say most people enroll in Part D, but you get the point. There isn't one universal answer, and understanding the structure can help you make better decisions. So let's get into the top three where costly mistakes can happen.

One of the most annoying Medicare surprises is learning that some people pay more for Medicare based on income, and this mainly affects Part B and Part D premiums. The rule is called IRMAA, and yes, this industry is addicted to acronyms. IRMAA stands for income-related monthly adjustment amount. What it means is this: if your income is high enough, Medicare says your premiums are going to cost more. And the look-back is two years. They look back two years at your tax return, so your Medicare premiums in 2026 will usually be based on your 2024 income. That's good to know, because income often changes quite a bit right around retirement. The final working years can sometimes be the highest income years of someone's life. Or maybe someone receives a large bonus, payout, or distribution, sells their business, sells an investment property, or does a large Roth conversion. Those decisions can make sense financially, but if they happen too close to Medicare eligibility, they can temporarily push income high enough that Medicare premiums increase a couple years later. To be clear, this shouldn't steer you away from those financial decisions, because it normally doesn't make or break a retirement plan, but it could be an unpleasant surprise you didn't see coming. The reason Medicare does this is straightforward: higher-income households are expected to pay a larger share of the program's cost, while lower-income retirees pay less. Understanding the timing helps you make more informed decisions, or at the very least know it's coming. Unexpected costs always feel worse than expected ones. It's like thinking a drive will take 30 minutes and it suddenly takes an hour. If you knew ahead of time it would take an hour, it wouldn't feel nearly as frustrating.

The next decision is how you want your Medicare coverage structured. At the most basic level, you're deciding how much of your health care costs you want to insure away, and how much you're comfortable covering yourself. Some retirees simply use original Medicare, Part A and Part B, and pay certain deductibles or coinsurance themselves, while also maybe adding Part D. Some also choose Medigap, which helps reduce many of those deductibles and coinsurance costs, and people who choose Medigap often like predictable medical costs. And another path is Medicare Advantage. It's really helpful to know this before you enroll, coming from a place of confidence and an educated decision, because an important detail is that when you first enroll around age 65, you typically have guaranteed access to everything. Later on, switching options can become more complicated depending on the state and the policy. So understanding how these structures work early can help you make a more informed decision.

And last but not least, Part B enrollment timing. When you turn 65, Medicare gives you an initial enrollment window. It begins three months before your birthday month, includes your birthday month, and continues three months after, so it's a seven-month window. During that time, many people enroll in Part A and Part B. But there's an important exception: if you're still working and covered by an employer health insurance plan, you can often delay Part B without penalty. Many people still enroll in Part A even while working, since it usually doesn't have a premium if you've worked long enough, but they delay Part B because they already have coverage through work. There are penalties if you don't enroll in time. And there's one situation where people can delay Part A as well, and that involves health savings accounts. Once you enroll in any part of Medicare, you can no longer contribute to an HSA. So if someone is still working and wants to keep maxing out their HSA before retirement, which can be a smart strategy, they would delay enrolling in Part A and Part B, because enrolling would stop those contributions. The key detail is that the coverage must be active employer coverage. COBRA does not count the same way, and marketplace plans usually do not count the same way. If someone delays enrollment when they shouldn't have, without an active employer plan in place, Medicare applies a penalty. It's not the worst penalty in the world, but your Part B premium increases 10% for every year you delay, and that higher premium sticks around for as long as you have Part B, which for most people is life.

So there you have it. Now you know quite a bit about Medicare, what it involves, and some of the things to think about before enrolling. It's not all that scary. It is important that you get these right. Things stack, and if you can get the easy things right, you'll feel better about it. Medicare was created to provide health care security in retirement, and for millions of Americans it has done just that. But like most government programs, the rules can feel confusing until you step back and see how the pieces fit together. And that clarity is what good financial planning is all about.

Hosted byNick GeorgeCFP®, ChFC®, CLU®, IWA™FounderView bio →

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