"8 Disappointing Realities of Medicare." HSAs Help with 5+.

Medicare coverage is widely misunderstood by Americans under the age of 65. Those who fund Health Savings Accounts during their working years can better manage the consequences of their lack of understanding.

MSN.com recently published an attention-grabbing blurb entitled "8 Disappointing Realities of Medicare." It's a quick read and is, if my ongoing informal surveys of friends and family are correct, an eye-opener for many people who believe that Medicare coverage is premium-free, reimburses the same range of health-related services as employer-sponsored benefits, and leaves patients with little out-of-pocket exposure.

Many Americans don't consider medical costs when they project their expenses in retirement. The most commonly quoted figure, by Fidelity, estimates that a typical couple retiring at age 65 this year will spend about $315,000 on medical (and related services like dental, vision, and hearing) care and medical coverage during their remaining lives (about 38 total years between them).

Fortunately, Health Savings Accounts help owners by reimbursing many of these expenses tax-free. In fact, of the eight shortcomings in Medicare listed in the article, Health Savings Accounts owners can offset in part the consequences of at least five.

"Your Premium May Be Higher Than Expected"

Many people not enrolled in Medicare don't think about their cost of coverage or assume that they pre-pay their Medicare premiums through the payroll (FICA) taxes that they pay during their working years. Wrong! Those payroll taxes (2.90% of pay, divided equally [1.45% each] between employer and employee) cover most senior's Part A (inpatient, home-health, and hospice care) premiums for life. Part B (outpatient services) and Part D (prescription drugs) are available with a monthly premium of at least $164.90 for Part B and an average of about $35 for Part D.

How Health Savings Accounts help: Medicare premiums are a qualified expense for tax-free reimbursement from a Health Savings Account. A senior with a 20% marginal tax rate in retirement effectively pays only $131.92, not the full $164.90, monthly by withdrawing tax-free funds from her Health Savings Account. That's about $400 in annual savings on Part B premiums, or lifetime savings of about $8,000 for women (20 additional years of projected life at age 65) and about $7,125 for men (18 years).

"Many Things Are Not Covered"

It's true. Medicare doesn't cover most dental care, vision services, or hearing aids. It doesn't cover chiropractic care and some other services that most commercial medical plans reimburse. These expenses are included in the $315,000 figure above. It's not difficult to imagine paying an average of $1,000 or more annually for dental cleanings, fillings, root canals, implants, and crowns, in addition to new glasses or hearing aids.

How Health Savings Accounts help: The list of expenses qualified for tax-free reimbursement from a Health Savings Account is independent of the services covered by Medicare (or your pre-Medicare commercial plan). Services that diagnose, cure, mitigate, prevent, or treat an injury, illness, or condition are qualified for tax-free reimbursement from a Health Savings Account. Thus, a Medicare enrollee in the 20% marginal tax bracket who incurs $3,000 of restorative dental expenses (implant and crown) one year can save $600 in taxes by withdrawing the funds from a Health Savings Account (no tax consequences) rather than a tax-deferred retirement account (included in taxable income.

"You Still Have to Pay for Long-Term Care"

Medicare doesn't cover your stay in a nursing home. You may never end up spending a night in a nursing home. But many older Americans do (you can view some statistics here). How much does a stay in a nursing-home cost? The national average was about $100,000 annually in 2021, though prices vary by region and facility. You can check the average daily, monthly, or annual cost using a calculator here. Medicaid, a federal-state program, does cover nursing-home expenses, but only after you've spent virtually all your savings and commit all but a fraction of your Social Security check on these costs.

How Health Savings Accounts help: Long-term care premiums are a qualified expense up to limits based on age band as published annually by the Internal Revenue Service. When you purchase a qualified plan, you can reimburse tax-free from your Health Savings Account about $1,800 annually if you're in your 50s and nearly $4,800 when you're in your 60s. At a 33% marginal tax rate, your tax savings are about $600 and $1,600, respectively. The premium amount that can be reimbursed tax-free is adjusted annually for inflation.

"If You Sign up Late, You Could Be Penalized - for Life"

If you're like most Americans, you're entitled to (can enroll in) Medicare around your 65th birthday. You're not required to enroll unless you're collecting Social Security or federal Railroad Retirement benefits, in which case you must enroll in Part A, which is generally premium-free. (Note: Also, if you remain active at work at a company with fewer than 20 employees, your company's insurer, not Medicare, may require you to enroll in Part A and Part B to remain covered on the group plan). If you delay enrollment, you may be subject to lifetime Part B and Part D premium surcharges.

How Health Savings Accounts help: Medicare Part B and Part D premiums - including surcharges for delayed enrollment if applicable - are qualified for tax-free reimbursement from a Health Savings Account. If, for example, you delay enrolling in Part B for three years without remaining covered by an employer-sponsored plan, you pay a 36% lifetime premium surcharge. In 2023, you'd pay $224.26 monthly if the standard $164.90 monthly premium applies to you (your premium may be higher, depending on your income). The full premium (even amounts above the standard, based on your income) and surcharge are qualified expenses. Of course, you want to avoid surcharges if delaying enrollment doesn't offer a corresponding financial advantage. But if you do incur these lifetime surcharges, you can pay the additional monthly premium via tax-free withdrawals from your Health Savings Account.

"Medicare Advantage Plans Typically Limit Your Provider Choices"

Medicare Advantage (MA) is a private alternative to traditional Medicare. These private plans are regulated by Medicare and look like the HMO or PPO plans in which you were enrolled (either employer-sponsored or nongroup coverage) prior to Medicare. They often charge no premium (above your Part B premium, which you pay to enroll in an MA plan) and provide additional benefits beyond Medicare (like some extra preventive services and discounts on health clubs and other health-related services and products). These plans typically don't contract with every provider, so the network is a key variable in determining whether this coverage is right for you.

How Health Savings Accounts help: A Medicare Advantage plan may be the perfect option for you, except that your ophthalmologist, who's been monitoring and managing your elevated ocular pressure for decades, isn't part of the network. In this case, think about the services that you receive in a typical year from that doctor and determine how much you'll owe if you pay outside insurance. (Remember, you no longer receive the discounts that your insurer negotiated, but your doctor may offer an attractive cash price for diagnostic visits and related testing.) These services are qualified expenses that you can reimburse tax-free from your Health Savings Account. As noted earlier, the list of expenses qualified for tax-free withdrawals is much larger than the services that your insurer covers.

Other Issues

The article lists three other "disappointing realities" that Health Savings Accounts don't address directly:

• "You might need to purchase a supplement plan." Most enrollees in traditional Medicare also purchase a Medicare supplement plan, which reimburses some of the deductibles, coinsurance, and copays that Part A and Part B impose. This coverage is an important strategy to transfer risk, as explained below. Premiums for Medicare supplement plans (also called Med Supp, Medigap, or Medex plans) aren't a qualified expense.
• "Without a supplement plan, there is no limit on out-of-pocket costs." Unlike plans governed by provisions of federal insurance law, Medicare Part B doesn't include an out-of-pocket limit. Enrollees pay 20% coinsurance after a small deductible for every service. Thus, if you undergo $100,000 of outpatient radiation and chemotherapy treatments for cancer, you'd pay $20,000 without a supplement plan. Your Health Savings Account can help here, as you can reimburse your coinsurance tax-free from your account. But most people enrolled in traditional Medicare are far better off financially insuring against unlimited coinsurance than draining their account in a single high-claim year or a single high-cost treatment.
• "You only get [sic] one shot at guaranteed Medigap coverage." Medicare supplement plans are governed by state law. In most states, you can purchase this coverage without medical underwriting only when you first enroll in Medicare. If you choose a Medicare Advantage plan initially and later want to switch to traditional Medicare, you must go through the underwriting process in many (but not all - see here) states. Insurers can reject you for pre-existing conditions (such as diabetes, cancer, and heart disease). Health Savings Accounts have no role to play in this process.

The Bottom Line

Most Americans don't understand Medicare rules. Why? Most people don't work with retirement counselors. Most employers don't offer education. Streaming services haven't built multi-season content around the adventures and challenges of enrolling in and receiving care through Medicare. Rather, most advice comes from family members, hairdressers, the Grand Poobah at the Leopard Lodge, fellow parishioners, fellow inmates, or fellow shoppers in the check-out line who don't understand the program themselves. It's important for anyone approaching age 62 (the age of eligibility to begin to receive Social Security benefits, which trigger automatic enrollment in at least Medicare Part A at age 65) to understand how the program works and determining the right time to enroll.

Funding a Health Savings Account is no antidote to the shortcomings of Medicare or ignorance about how Medicare works. But your account can help you manage the cost of coverage and care associated with your enrollment in Medicare.

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.