If you are a British expat looking to retire, you probably need some help understanding Medicare. Medicare can get overly complicated, even for natural-born US citizens.
This blog introduces British expats to the different elements of Medicare, some of the potential costs, the private insurance additions of Medigap and Medicare Advantage and finally some really important issues to be aware of. Before we get started, Medicare is not to be confused with Medicaid. Medicare is government subsidized retiree healthcare and Medicaid is a state-run medical assistance program for people on low income.
If you’re similar to other expats, you’re probably anxious about the ever-present threat of an unexpected and crippling medical bill. This is a tragic indictment of the American system – that many of its hard working and successful residents live out their retirement in perpetual fear – but that’s a thread for us to pull at over a beer or glass of wine.
Anyway, back to the topic at hand, Medicare: how does it work, what does it cover and what are the gaps?
Here’s a 24-page guide from the Social Security Administration on Medicare:. Here’s a high-level summary:
- Medicare is America’s Health Insurance program for age 65 and over
- It helps with the costs, but does not cover all costs
- It is funded in two ways:
- Payroll taxes i.e. the 1.45% you pay and the 1.45% your employer pays on all your earnings while you are working, (this is in addition to the 6.2% + 6.2% you and your employer pay on earning up to $160,200 in 2023 which funds your retirement benefits), plus an additional 0.9% on earning over $250,000 for “Married filing Jointly
- Monthly premiums that are usually deducted from your Social Security checks once you are in retirement.
The Four Parts to Medicare:
Part A – HOSPITAL INSURANCE:
Helps pay for inpatient care in a hospital or skilled nursing facility.
Available at no cost for those who are over 65 and eligible for Social Security benefits (i.e. you or your spouse has at least 10 years/40 quarters worth of contributions).
Part B – MEDICAL INSURANCE:
Helps pay for doctors and other outpatient care, home health care and durable medical equipment.
Anyone who is eligible for Medicare Part A at no cost can enroll in Medicare part B by paying a monthly premium that is based on your income (i.e. higher income = higher premium).
Part C – MEDICARE ADVANTAGE PLANS:
Private policies that incorporate Medicare and more.
If you receive your Part A and Part B benefits directly from the government, you have “original Medicare”. If you receive your benefits from a Medicare Advantage organization or other private company, you have a Medicare Advantage plan. Many of these plans provide extra coverage and may lower your out-of-pocket costs.
You might have to pay a monthly premium for your Advantage plan because of the extra benefits it offers.
Part D – PRESCRIPTION DRUG COVERAGE:
Helps cover the cost of prescription drugs.
Anyone who has Medicare Part A or Part B is eligible for Part D (prescription drug coverage). Part D benefits are available as a stand-alone plan or built into Medicare Advantage. The drug benefits are the same in either plan. Joining a Medicare prescription drug plan is voluntary, and you pay an extra monthly premium for the coverage. Like Part B, the monthly premium is based on your income (i.e. higher income = higher premium). You can also incur substantial out of pocket costs for prescription drugs, but with the passing of The Inflation Reduction Act 2022 this exposure will be capped at $2,000 p.a. from 2025.
It is important to stress that, in addition to any premiums you pay for your coverage, you are still subject to copays and deductibles (including for treatment that falls under part A). For example, Part A has no premium (assuming you qualify) but it has a $1,600 deductible (2023) and annual benefit cap; Part B has a deductible of $226 (2023) and a 20% copay for all covered Part B expenses. This is in addition to the monthly income-assessed premium. This additional exposure is the main reason many people take out additional private Medigap supplement insurance plans.
Medicare Advantage (aka Part C)
As a reminder, Medicare Advantage Plans include Medicare part A and B, and frequently part D. They come in a variety of options – basically the same dizzying, confusing array of any private health insurance in this country – HMOs/PPOs/PFFSs/HMOPOSs etc. The Medicare elements of the plans are paid for by Medicare, reducing your premiums and/or additional out of pocket expenses.
One of the main reasons for taking out a Medicare Advantage plan is to provide coverage for some of the out-of-pocket expenses referenced above. So while Medicare will pay for the Medicare elements, you will have to cover the cost of the additional coverage.
The other option to cover some of the out-of-pocket expenses are Medigap plans.
If you have Medicare Advantage you are not on Medicare. You have private insurance, some of the cost of which is covered by Medicare.
Medigap is supplemental insurance you can buy from a private company to cover some of these out-of-pocket expenses. There are a variety of Medigap policies available, depending on how many of these costs you want covering (labeled “A” through “N”). Premiums vary among insurance companies, but the benefits of each standard plan are always the same (e.g. Medigap Plan A is the same, regardless of who you purchase it through).
Medigap policies are only available to those covered by “original Medicare”. If you are covered by an Advantage Plan (i.e. from a private insurance company) then you cannot take out a supplemental Medigap policy, but then you shouldn’t need to because you have a Medicare Advantage Plan that offers the level of coverage you desire.
If you want some more information on Advantage Plans and Medigap policies, here are two useful resources:
It would be natural to think that after paying Medicare payroll taxes for several decades that your retirement healthcare costs would be insignificant. Unfortunately, this is not the case. To provide some perspective, when we are doing retirement planning for our clients we assume total Medicare plus out-of-pocket costs of $7,500 per person, per annum (i.e. $15,000 per couple).
Here’s some useful information from Vanguard, if you want to investigate this further.
Some Things to Note
- Not all doctors accept Medicare. Thanks to the federal program’s low reimbursement rates, stringent rules and gruelling paperwork process, many doctors refuse to accept Medicare’s payment for services. Be sure to check before any visits, because if you see a doctor who doesn’t then you’ll potentially be on the hook for the full amount.
- An Advantage Plan may give you flexibility to see specific doctors, even if they don’t accept Medicare directly.
- Medicare does not include dental, vision or hearing.
- Medicare (original and Advantage) does not include Long Term Care (LTC). There is separate, private insurance for LTC.
- Admission Vs Observation – if you end up in hospital, make sure you know if you’ve been admitted or are there for observation as it can make a big difference in after-care provision. If you have been admitted for at least 3 days, then Medicare should cover most subsequent care (e.g. skilled nursing facilities). If you were only there for observation (and thus considered an outpatient), then Medicare will not cover the cost.
- Medicare generally doesn’t cover treatment outside the USA. (I would have thought this was obvious, but apparently this seems to take a lot of people by surprise). There are some exceptions, but they are extremely limited in scope and thus not worth introducing here. There are
- Medigap policies that will cover emergency care abroad and of course there is always travel insurance (that will also usually cover emergency medical evacuation).
- Enrolment – as with all things health insurance there is a complicated and intimidating web of enrolment windows when you can apply.
- To ensure you don’t suffer any period without coverage, you can enrol in Medicare in the three months running up to your 65th birthday and then for the three months that follow.
So, I don’t have to worry about a surprise, crippling medical bill?
Hopefully! Medicare is pretty good in this regard – most physicians are “participating” which means they accept Medicare in full (i.e. they cannot request any further payment from you). Even the non-participating ones who can “balance bill” you are capped at 15% of the Medicare-approved payment amount (so for Part B, you’d be on the hook for up to 35% (20% copay +15% limiting charge).
WARNING: Both participating and non-participating physicians may accept Medicare. There are also “Opt-out providers” who do not accept Medicare at all and have signed an agreement to be excluded from the Medicare program. This means they can charge whatever they want for services but must follow certain rules to do so. Such providers must give you a private contract describing their charges and confirming that you understand you are responsible for the full cost of your care and that Medicare will not reimburse you.
In addition to the Inpatient / Outpatient (Admission Vs Observation) loophole that medical facilities apparently manipulate (see above) with potentially devastating consequences to their patient, Part B (outpatient) has a 20% copay with no maximum, so it may be wise to consider a Medigap or Medicare Advantage plan to cap this exposure.
And, as mentioned earlier, prescription drugs costs can spiral, even for those with Part D, although this should be capped at $2,000 p.a. from 2025.
Honestly, the medical/health insurance situation in the US is bewildering and intimidating and researching for this blog did not help alleviate that feeling. Having said that, Medicare seems infinitely preferable to the pre-Medicare position which, even when covered by the most comprehensive private health insurance policy, leaves us at risk of receiving a devastating surprise bill for using an out-of-network provider or being balance billed tens or even hundreds of thousands of dollars.