Your Guide to Maximizing Medicare

Choosing the best coverage options could save you hundreds of dollars a year

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Linda Jones spent much of her late 50s and early 60s worrying about how she would find affordable health insurance if she lost the group medical benefits provided by her job at the University of Oklahoma. "I had to negotiate a deal with the university in order to stay employed and covered by their insurance until I reached Medicare age," says Jones, 66. She qualified for Medicare last year, which costs $96.40 each month and is automatically deducted from her Social Security check. Compared with individual policy costs, Jones's government health insurance is inexpensive. Still, Medicare alone won't cover all of her retirement medical expenses.

As Jones discovered, retirees must navigate Medicare's alphabet-soup application process and choose among competing prescription drug plans that may not cover all the necessary medications. Here's how to get the most out of the Medicare system:

Enroll right away. Medicare beneficiaries may sign up during a seven-month window beginning three months before their 65th birthday. Apply right away to avoid Medicare Part B premium increases of 10 percent for each 12-month period you delay enrollment. Seniors still employed and covered by a group health plan after age 65 should enroll within eight months of leaving the job to prevent the penalty. If you purchase a private Medigap policy within six months of signing up for Medicare Part B, insurance companies cannot refuse to sell you a policy or charge more because of health problems. Medigap policies, labeled A through L by the government, all have specific benefits so you can shop around based on price.

[Check out America's Best Affordable Places to Retire.]

Budget for uncovered costs. Medicare's out-of-pocket expenses can add up over your lifetime. The physician coinsurance, which is 20 percent, has no out-of-pocket limit, cautions Jonathan Gruber, an economist at the Massachusetts Institute of Technology. For example, if you used $100,000 of physician services in a year, you would owe $20,000. According to calculations by the Employee Benefit Research Institute, a couple, both age 65 in 2009, will need $210,000 to have a 50 percent chance of affording their retirement medical needs. That number assumes the couple does not have employment-based retiree health benefits and purchases Medicare Part B medical insurance, Part D prescription drug coverage, and a Medigap policy.

EBRI's calculation is similar to Fidelity's estimate that a 65-year-old couple retiring in 2009 will need approximately $240,000 to cover retiree medical expenses. However, EBRI went further, stating that the couple will need $338,000 to have a 90 percent chance of being able to pay their medical bills. These estimates do not include the savings needed for long-term care, above-average prescription use, or the expenses associated with retiring before becoming eligible for Medicare—all of which could increase healthcare costs. "Most nursing home expenses aren't covered at all," cautions Jonathan Skinner, a professor of economics at Dartmouth. "Medicare will cover time in a skilled nursing facility for only a limited time." Other services not covered by Medicare include eye exams, dental care, eyeglasses, and hearing aids.

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Compare prescription drug plans. Even though Medicare beneficiaries can choose from more than 40 prescription drug plans in each state, only 6 to 9 percent of seniors selected the lowest-cost plan for their drug needs in 2006, according to a Kaiser Family Foundation analysis. Kaiser calculates that seniors could have saved an average of $360 to $520 annually by comparing prices. Dorothy Kostriken, 75, a family psychologist in Arcata, Calif., says she saved $800 after switching into a lower-cost prescription drug plan in January. "By shopping around, you can find a plan that is much cheaper," she says. "You have to have perseverance in looking at all the options." Compare expected out-of-pocket costs for drugs under the various local plans at medicare.gov. Retirees can switch into new plans once a year during the open enrollment period.