In the initial post in this two-part series looking Under the Hood on Medicare, Medicare Parts A, B, C and D—What You Need to Know, we presented a primer on the four different parts of the Medicare system and their origins, growth, options and costs.
This week we’ll focus on Medicare premiums, which I believe are quickly becoming an integral part of the financial planning process; each advisor should have at least a cursory understanding of the cost of the program.
Medicare Part A Premiums
As mentioned, this part of Medicare covers inpatient hospital, skilled nursing care, and nursing home and hospice care, within limits. Moreover, it is free to those who qualify for Medicare (i.e.; paid into Medicare for at least 10 years). This includes a spouse of those who have paid into Medicare, even if the spouse hasn’t paid into the system.
If an individual is not eligible for free Part A, they may still purchase it by paying a premium up to $426 per month. Moreover, if you don’t qualify for free Part A, and you don’t buy it when you first become eligible, you may be subject to a penalty equal to a 10% increase in the monthly premium.
For example, if you were eligible for Part A two years ago and you enroll today, you would pay the higher premium for two times the period for which you were eligible but not enrolled. Hence, the higher premium would last four years. There are, however, some exceptions which are beyond the scope of this article.
One final note on Part A. If you choose to buy Part A you must also purchase Medicare Part B.
Part B Premium
This is the portion of Medicare which covers outpatient services and is optional. It should be noted that your premium for Part B will be based, in some cases, on your income from as many as two years. For example, if you became eligible for Medicare in March 2014 and enroll in Part B, assuming you hadn’t filed your 2013 tax return by then, Medicare would use your income tax return from 2012 to determine your premium. Hence, if your retirement income is much lower than your income while working, your Part B premium may cost you more than you anticipated.
The premium is based on income and, just like Medicare Part A, if you fail to enroll in Part B when first eligible and do not have a valid exception (again beyond the scope of this article), you may be subject to a penalty which is much more onerous than the penalty from Part A.
In short, the penalty is a 10% premium increase for each full 12-month period you are late in enrolling. Hence, if you were 38 months late (three full years plus two months), your premium will be 30% higher for as long as you have Part B.
The following table displays the cost of Medicare Part B and Part D which we’ll discuss in the next section.
Part D Premium