Of all the potential expenses you may face during retirement, health care may be the biggest wild card of all. Your costs for housing, transportation, food and clothing, and other essentials can be predicted with some accuracy, but it’s tough to know how much to budget for medical costs. With your health, there’s no telling what kind of hand you may be dealt.
One way to get a better idea of how much you might spend on prescription drugs in retirement is by examining the new Medicare prescription drug benefit, which took effect January 1. Even if you won’t be eligible for Medicare for many years, understanding how the system works may help you better anticipate how you will manage your retirement medical costs.
Government Plan, Private Companies
The essence of the Medicare drug benefit is insurance coverage for qualifying prescription drug expenses through private insurance companies. Individuals who have Medicare Part A or Part B, or both, are eligible to purchase a Plan D drug policy from one of the private insurance companies offering coverage in their area. Most people will be able to choose from at least two plans, and likely many more if they live in a populous area. (For example, Los Angeles County residents can choose from roughly 100 plans offered by some 30 insurance companies,) according to the U.S. Dept. of Health and Human Services.
Plans vary widely in their structure and premiums, but all companies must offer benefits that meet a basic standard set by Medicare. Some insurance companies offer several different drug plans, including those that exceed the Medicare standard, but typically for a higher premium. Paying a higher premium may mean a greater choice of participating pharmacies, more qualifying drugs, a different copay structure, and other improvements over the basic standard.
According to the Medicare basic standard, a covered individual would:
• Pay the first $250 each year in costs for covered drugs (the annual deductible in 2006)
• Pay 25 percent of the cost of covered drugs between $251 and $2,250
• Pay all of the cost of covered drugs between $2,251 and $5,100
• Pay 5 percent of the cost of covered drugs above $5,100 (the minimum copay is $2 for generic drugs and
$5 for brand-name drugs)
More Choices
Plan D coverage further breaks down into two basic types of plans.
• Stand-alone prescription drug plans offer prescription drug coverage only. This option allows
individuals to buy the prescription drug benefit without changing their current Medicare coverage.
• Medicare Advantage Plans and Medicare Health Plans allow individuals to purchase the drug benefit
as part of their overall health-care coverage.
Premiums are expected to average about $32 a month in 2006 for the prescription drug benefit, but actual premiums vary greatly. Participants may pay anywhere from nothing to more than $400 per month for an all-inclusive health-care plan that includes the prescription drug benefit, according to the Medicare Rights Center.
It’s important to stay abreast of the requirements for enrollment. Although Part D enrollment is optional, you could be required to pay a penalty if do not enroll when you first become eligible. The penalty is 1 percent of the average national premium for every month that you delay enrollment. The penalty is added to your monthly premium payment for life, unless you qualify for certain low-income exceptions.